Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Undervalued Companies for the Defensive Investor Near 52 Week Lows – September 2014. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how CF Industries (CF) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): CF Industries Holdings, Inc. is a manufacturer and distributor of nitrogen and phosphate fertilizer products worldwide. The Company operates in two segments: the nitrogen segment and the phosphate segment. The Company’s principal products in the nitrogen segment are ammonia, granular urea, urea ammonium nitrate solution (UAN) and ammonium nitrate (AN).Its other nitrogen products include urea liquor, diesel exhaust fluid (DEF) and aqua ammonia, which are sold primarily to its industrial customers. Its principal products in the phosphate segment are diammonium phosphate (DAP) and monoammonium phosphate (MAP). During the year ended December 31, 2012, the Company sold 13.0 million tons of nitrogen fertilizers and 2.0 million tons of phosphate fertilizers. In May 2013, CF Industries Holdings Inc acquired 34% stake in Canadian Fertilizers Ltd.
Defensive Investor – must pass at least 6 of the following 7 tests: Score =Â 6/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â PASS
- Earnings Stability – positive earnings per share for at least 10 straight years -Â FAIL
- Dividend Record – has paid a dividend for at least 10 straight years -Â PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period -PASS
- Moderate PEmg ratio – PEmg is less than 20 -Â PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 -Â PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 -Â PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 -Â FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
Valuation Summary
Key Data:
| Recent Price | $250.64 |
| MG Value | $832.73 |
| MG Opinion | Undervalued |
| Value Based on 3% Growth | $313.63 |
| Value Based on 0% Growth | $183.85 |
| Market Implied Growth Rate | 1.54% |
| Net Current Asset Value (NCAV) | -$68.79 |
| PEmg | 11.59 |
| Current Ratio | 4.73 |
| PB Ratio | 2.78 |
Balance Sheet – 6/30/2014
| Current Assets | $3,405,700,000 |
| Current Liabilities | $720,300,000 |
| Total Debt | $4,592,400,000 |
| Total Assets | $11,304,900,000 |
| Intangible Assets | $2,095,700,000 |
| Total Liabilities | $6,822,600,000 |
| Outstanding Shares | 49,670,000 |
Earnings Per Share
| 2014 (estimate) | $18.09 |
| 2013 | $24.74 |
| 2012 | $28.57 |
| 2011 | $21.99 |
| 2010 | $5.34 |
| 2009 | $7.43 |
| 2008 | $12.14 |
| 2007 | $6.57 |
| 2006 | $0.60 |
| 2005 | -$1.99 |
| 2004 | $1.23 |
Earnings Per Share – ModernGraham
| 2014 (estimate) | $21.63 |
| 2013 | $21.47 |
| 2012 | $18.26 |
| 2011 | $12.30 |
| 2010 | $7.11 |
| 2009 | $6.98 |
Dividend History
CF Dividend data by YCharts
Conclusion:
CF Industries is suitable for both the Defensive Investor and the Enterprising Investor.  The Defensive Investor’s only initial concern is the lack of earnings stability over the last ten years.  The Enterprising Investor’s only concern is the high level of debt relative to the net current assets.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with research into the company and comparing it to other opportunities.  From a valuation perspective, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $7.11 in 2010 to an estimated $21.63 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 1.54% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.
Be sure to check out the previous ModernGraham valuations of CF Industries Holding Co. (CF) for more perspective!
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on CF Industries Holding Co. (CF)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer:  The author did not hold a position in CF Industries Holding Co. (CF) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.
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