Grow Your Profits with Fertilizer Stock CF Industries (CF)

by Ian Harvey | September 19, 2013 11:09 am

CF Industries Holdings (CF[1]), an Illinois-based manufacturer and distributor of fertilizer products, is a company with an undervalued stock, though its fundamentals actually look great. There are also several positive points of interest that makes CF an ideal candidate for a call option.

Sustainability

Founded in 1946, it has a long history of operations, and it is a very simple business that engages in one of the most necessary forms of enterprise in history: fertilizer.

With an $11.8 billion market cap, it is the second-largest publicly traded nitrogen fertilizer producer in the world and the third-largest producer of phosphate fertilizer.

Buybacks and Growth

The company considers itself undervalued and has embarked on a $3 billion stock buyback program. Given the repurchases this year alone are nearly $1.1 billion, CF Industries may be done sooner than its 2016 target date.

CF Industries is also investing in expansion: It’s one of the first companies bringing on new fertilizer capacity in North America.

Fundamentals Look Great

Its annual dividend yield is 0.8%, but it’s trading at a significant discount to its historical average, with a current P/E ratio of 6.5 compared with a five-year average of 11.1.

To top this off, the company has an ROE of 29.2%, an operating margin of 34.4%, a net profit margin of 19.2%, and a free cash flow margin of 22.7%. This is all on top of trading at a paltry 6.8 times earnings!

Hedge Funds Support CF

Heading into Q3, many of the hedge funds were long in CF, an increase of 12% from the first quarter. With the smart money’s sentiment swirling, there exists a few key hedge fund managers who were increasing their stakes considerably.

Renaissance Technologies holds the biggest position in CF Industries with a $190.5 million position in the stock, comprising 0.5% of its 13F portfolio. The second largest stake is held by ValueAct Capital,which held a $171.5 million position; 1.8% of its 13F portfolio is allocated to the stock. Other hedgies with similar optimism include Adage Capital Management, Third Point and D.E. Shaw.

091912-CF-ANALYSTS[2]

Crossed the 200 Day Moving Average

In trading on Monday, shares of CF Industries crossed above their 200 day moving average of $196.85, changing hands as high as $203.19 per share. The chart below shows the one year performance of CF shares, versus its 200 day moving average:

091913-CF-CHART[3]

Looking at the chart above, CF’s low point in its 52 week range is $169.33 per share, with $233.43 as the 52 week high point — that compares with a last trade of $206.54.

Continuity of Management

The longtime chief executive of CF Industries Holdings will retire and be replaced internally, just as it carries out a $3.8-billion expansion.

Tony Will, 48, the senior vice-president of manufacturing and distribution at the Deerfield, Illinois-based company, will replace CEO Steve Wilson, 64, on Jan. 1, 2014.

Wilson, CF’s CEO for 10 years, will stay on as a director and serve as non-executive chairman.

Joel Jackson, an analyst at BMO Nesbitt Burns, doubts this will be a major shakeup, since Will comes from the manufacturing side of CF Industries. “I don’t know if we should expect any seismic change at CF anytime soon,” Jackson said in a press release[4].

Therefore, take advantage of the positives flowing from CF and execute the following options call:

OPTIONS TRADE: Buy the CF Jan 2014 240.000 call (CF140118C00240000[5]) at or under $2.50, good for the day. Place a protective stop limit at $1.00 and a pre-determined sell at $3.80.

 

Endnotes:
  1. CF: http://studio-5.financialcontent.com/investplace/quote?Symbol=CF
  2. [Image]: http://investorplace.com/wp-content/uploads/2013/09/091912-CF-ANALYSTS.jpg
  3. [Image]: http://investorplace.com/wp-content/uploads/2013/09/091913-CF-CHART.png
  4. said in a press release: http://www.reuters.com/article/2013/09/16/cfindustries-ceo-idUSL2N0HC0I220130916?type=companyNews&feedType=RSS&feedName=companyNews
  5. CF140118C00240000: http://studio-5.financialcontent.com/investplace/quote?Symbol=CF140118C00240000

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