CF Industries Holdings Analysis – June 2015 Update $CF

CfindustrieslogoCF Industries (CF) currently yields about a 1.9% dividend, and has grown its earnings well over the last few years. Recently, multiple analysts have focused on qualitative factors when reviewing the company. For example, Seeking Alpha contributor Eric Gregg recently wrote that the company is significantly undervalued partially based on its aggressive share buybacks. On the other hand, Peter Mantas posited that the company is overvalued due in part to its extensive stock price run up in recent years. These are great factors to consider in the final stages of an investment decision, but first one must use quantitative metrics to determine the company’s intrinsic value.

Benjamin Graham, the father of value investing, taught that the most important aspect to consider is whether the company is trading at a discount relative to its intrinsic value. It is through a thorough fundamental analysis that the investor is able to make a determination about a potential investment’s merits.

The model is inspired by the teachings of Benjamin Graham and considers numerous metrics intended to help the investor reduce risk levels. The first part of the analysis is to determine whether the company is suitable for the very conservative Defensive Investor or the less conservative Enterprising Investor, who is willing to spend a greater amount of time conducting further research.

In addition, Graham strongly suggested that investors avoid speculation in order to remove the subjective elements of emotion. This is best achieved by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another. By using theModernGraham method, one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.

CF Chart

CF data by YCharts

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Defensive Investor – Must pass at least 6 of the following 7 tests: Score = 6/7

  1. Adequate Size of Enterprise – Market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – Current ratio greater than 2 – FAIL
  3. Earnings Stability – Positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – Has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – Earnings per share has increased by at least 1/3rd over the last 10 years, using 3-year averages at the beginning and end of the period – PASS
  6. Moderate PEmg (price over normalized earnings) ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – Must pass at least 4 of the following 5 tests or be suitable for a Defensive Investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – Current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt-to-Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – Positive earnings per share for at least 5 years – PASS
  4. Dividend Record – Currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data

Recent Price $63.47
MG Value $180.22
MG Opinion Undervalued
Value Based on 3% Growth $69.96
Value Based on 0% Growth $41.01
Market Implied Growth Rate 2.33%
Net Current Asset Value (NCAV) -$20.97
PEmg 13.16
Current Ratio 1.82
PB Ratio 3.76

Balance Sheet – March 2015

Current Assets $2,380,000,000
Current Liabilities $1,311,000,000
Total Debt $4,593,000,000
Total Assets $11,485,000,000
Intangible Assets $2,090,000,000
Total Liabilities $7,423,000,000
Outstanding Shares 240,500,000

Earnings Per Share

2015 (estimate) $4.00
2014 $5.42
2013 $4.95
2012 $5.72
2011 $4.40
2010 $1.07
2009 $1.48
2008 $2.43
2007 $1.31
2006 $0.12
2005 -$0.14

Earnings Per Share – ModernGraham

2015 (estimate) $4.82
2014 $4.93
2013 $4.30
2012 $3.65
2011 $2.46
2010 $1.42

Dividend History

CF Dividend Chart

CF Dividend data by YCharts


CF Industries passes the initial requirements of both the Defensive Investor and the Enterprising Investor. The Defensive Investor is only concerned by the low current ratio, while the Enterprising Investor’s only concern is the level of debt relative to the net current assets. As a result, all value investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, it has grown its EPSmg (normalized earnings) from $2.46 in 2011 to an estimated $4.82 for 2015. This is a fairly strong level of demonstrated growth, and outpaces the market’s implied estimate for annual earnings growth of only 2.33% over the next 7-10 years.

In recent years, the company’s actual growth in EPSmg has averaged around 19.25% annually, and while the ModernGraham valuation model reduces the actual growth to a more conservative figure when making an estimate, the model still returns an estimate of intrinsic value well above the current price, indicating that CF Industries is significantly undervalued at the present time.

Disclaimer:  The author did not hold a position in any 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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