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 10 Stocks for Using A Benjamin Graham Value Investing Strategy – August 2016. 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 stock analysis showing a specific look at how CF Industries Holdings Inc (CF) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): CF Industries Holdings, Inc. is the manufacturer and distributor of nitrogen fertilizer and other nitrogen products. The Company’s nitrogen fertilizer products are ammonia, granular urea, urea ammonium nitrate solution (UAN) and ammonium nitrate (AN). Its other nitrogen products include diesel exhaust fluid (DEF), urea liquor, nitric acid and aqua ammonia, which are sold primarily to its industrial customers, and compound fertilizer products (NPKs). The Company’s segments include ammonia, granular urea, UAN, AN and Other. The Company’s ammonia segment produces anhydrous ammonia (ammonia), which is the concentrated nitrogen fertilizer product as it contains 82% nitrogen. Its granular urea segment produces granular urea, which contains 46% nitrogen. Its UAN segment produces UAN, which is a liquid fertilizer product with a nitrogen content that typically ranges from 28% to 32%. Its AN segment produces AN. Its Other segment includes DEF, urea liquor, nitric acid and NPKs.
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Downloadable PDF version of this valuation:
ModernGraham Valuation of CF – August 2016
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
What kind of Intelligent Investor are you?
| Defensive Investor; must pass 6 out of the following 7 tests. | ||||
| 1. Adequate Size of the Enterprise | Market Cap > $2Bil | $6,350,130,514 | Pass | |
| 2. Sufficiently Strong Financial Condition | Current Ratio > 2 | 4.36 | Pass | |
| 3. Earnings Stability | Positive EPS for 10 years prior | Pass | ||
| 4. Dividend Record | Dividend Payments for 10 years prior | Pass | ||
| 5. Earnings Growth | Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end | 61.94% | Pass | |
| 6. Moderate PEmg Ratio | PEmg < 20 | 8.84 | Pass | |
| 7. Moderate Price to Assets | PB Ratio < 2.5 OR PB*PEmg < 50 | 1.52 | Pass | |
| Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor. | ||||
| 1. Sufficiently Strong Financial Condition | Current Ratio > 1.5 | 4.36 | Pass | |
| 2. Sufficiently Strong Financial Condition | Debt to NCA < 1.1 | 2.13 | Fail | |
| 3. Earnings Stability | Positive EPS for 5 years prior | Pass | ||
| 4. Dividend Record | Currently Pays Dividend | Pass | ||
| 5. Earnings Growth | EPSmg greater than 5 years ago | Fail | ||
Stage 2: Determination of Intrinsic Value
| EPSmg | $2.94 |
| MG Growth Estimate | -2.92% |
| MG Value | $7.84 |
| Opinion | Overvalued |
| MG Grade | B- |
| MG Value based on 3% Growth | $42.65 |
| MG Value based on 0% Growth | $25.00 |
| Market Implied Growth Rate | 0.17% |
| Current Price | $26.00 |
| % of Intrinsic Value | 331.76% |
CF Industries Holdings, Inc. qualifies for both the Defensive Investor and the Enterprising Investor. In fact, the company meets all of the requirements of both investor types, a rare accomplishment indicative of the company’s strong financial position. . The Enterprising Investor has concerns regarding the level of debt relative to the net current assets, and the lack of earnings growth over the last five years. As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.
As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $3.65 in 2012 to an estimated $2.94 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 0.17% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.
At the time of valuation, further research into CF Industries Holdings, Inc. revealed the company was trading above its Graham Number of $5.55. The company pays a dividend of $1.2 per share, for a yield of 4.6%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 8.84, which was below the industry average of 12.12, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-35.99.
CF Industries Holdings, Inc. performs fairly well in the ModernGraham grading system, scoring a B-.
Stage 3: Information for Further Research
| Net Current Asset Value (NCAV) | -$35.99 |
| Graham Number | $5.55 |
| PEmg | 8.84 |
| Current Ratio | 4.36 |
| PB Ratio | 1.52 |
| Current Dividend | $1.20 |
| Dividend Yield | 4.62% |
| Number of Consecutive Years of Dividend Growth | 6 |
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Useful Links:
| ModernGraham tagged articles | Morningstar |
| Google Finance | MSN Money |
| Yahoo Finance | Seeking Alpha |
| GuruFocus | SEC Filings |
Most Recent Balance Sheet Figures
| Balance Sheet Information | 6/1/2016 |
| Total Current Assets | $3,374,000,000 |
| Total Current Liabilities | $773,000,000 |
| Long-Term Debt | $5,540,000,000 |
| Total Assets | $15,762,000,000 |
| Intangible Assets | $2,363,000,000 |
| Total Liabilities | $11,778,000,000 |
| Shares Outstanding (Diluted Average) | 233,500,000 |
Earnings Per Share History
| Next Fiscal Year Estimate | $0.08 |
| Dec2015 | $2.96 |
| Dec2014 | $5.42 |
| Dec2013 | $4.95 |
| Dec2012 | $5.72 |
| Dec2011 | $4.40 |
| Dec2010 | $1.07 |
| Dec2009 | $1.48 |
| Dec2008 | $2.43 |
| Dec2007 | $1.31 |
| Dec2006 | $0.12 |
| Dec2005 | -$0.14 |
| Dec2004 | $0.25 |
| Dec2003 | -$0.07 |
| Dec2002 | -$0.10 |
Earnings Per Share – ModernGraham History
| Next Fiscal Year Estimate | $2.94 |
| Dec2015 | $4.48 |
| Dec2014 | $4.93 |
| Dec2013 | $4.30 |
| Dec2012 | $3.65 |
| Dec2011 | $2.46 |
| Dec2010 | $1.42 |
| Dec2009 | $1.41 |
| Dec2008 | $1.18 |
| Dec2007 | $0.47 |
| Dec2006 | $0.04 |
| Dec2005 | -$0.01 |
| Dec2004 | $0.04 |
| Dec2003 | -$0.05 |
| Dec2002 | -$0.03 |
Recommended Reading:
Other ModernGraham posts about the company
Other ModernGraham posts about related companies
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.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.
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