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List of Articles Stocks and Investing Stocks I Own Stock Advice Weight Loss and Fitness Sports Donate Back to Home	A Financial Analysis of CF Industries Introduction CF Industries (CF) is an $8.61 billion company in the chemical manufacturing industry. Market capitalization competitors in this industry include PPG Industries, Sigma-Aldrich, and Celanese. The chemical manufacturing industry is down 24.62% over the past year compared to the S&P 500 which is down 18.66% during the same period. Over the past month, the industry has been down 29.30%, while the S&P 500 has been down 6.71%. Strong technical trends may be indicative of a continued expansion in this industry. Evidence comes from a potential turnaround in general equities. Moreover, as there seems to be evidence of confidence in equities, chemical manufacturing stocks like CF Industries will see future benefits. Also CF’s growth and valuation illustrate the potential for a strong earnings report next quarter. Business This section describes what CF Industries produces. According to Reuters, CF Industries “is a manufacturer and distributor of nitrogen and phosphate fertilizer products in North America.” The company bases its operations on two basic business segments. These two business segments include nitrogen fertilizer and phosphate fertilizer business. The Nitrogen fertilizer business focuses on producing ammonia, liquid urea, and UAN. This business focuses its operations in Canada and the United States. These are the same two locations for the phosphate fertilizer business. More specifically this business focuses on producing phosphate fertilizer used for transportation across the North American continent. The business segment CF operates with is growing very rapidly and still has the potential to grow even more, given the company’s core business model. Growth CF Industries has illustrated solid growth prospects over the past year. According to Reuters, CF Industries reported a $2.76 billion revenue product last year. This number is up over 41.49% than it was the previous year. Compared to the industry’s average of 25.83%, investors see the relative strength compared to other competitors. This number is higher than the company’s five year average of 22.14%. Moreover, competitor annual averages of 24.75% (PPG Industries) and 14.17% (Sigma-Aldrich) are lower than CF’s current figures. And given that CF’s five year average of 22.14% is higher than the industry’s five year average of 8.00%, this company has the potential to move even higher. CF’s earnings grew at a strong 301.64% last year—a number much higher than the industry average. Competitors such as Celanese only saw a 0.85% increase and PPG saw a disappointing increase in earnings of 12.87%. Therefore, both earnings and revenue growth is strong for CF Industries. In addition, CF Industries has kept its costs under control. According to Reuters, CF has reported gross, operating, and net profit margins of 28.33%, 25.85%, and 15.98% respectively over the past year. Moreover, these numbers are above the industry averages of 26.76%, 16.39%, and 12.21% respectively. The numbers are also above or near the company’s five year average respective numbers of 13.06%, 9.46%, and 4.26%. This comparison illustrates a history of strong cost controls and positively-related consistency. The current averages are also better (business model respected) than competitor Celanese’s respective operating and net income averages of 11.52%, and 5.35%. The same comparison can be made for Sigma-Aldrich and PPG. Therefore, CF has proved to be a solid company in this industry. Its services are well-controlled cost wise, especially to direct market-cap competitors. Compiling all this information together and investors comes across ROE. Over the past year, CF Industries reported an ROE of 43.66%. Therefore, out of all shareholder equity, more than 44% (near five year average) comes from earnings instead of debt or stock. This number is much stronger compared to the industry average of 11.02%, and the number is better than some competitor averages of 18.59% (PPG) and 20.21% (Sigma-Aldrich). Therefore, CF Industries has a history of strong earnings per its equity share—which reflects the strong capital gain movement over the past year. And if history is any indication, there should be no reason why CF Industries cannot continue its success. The same logic applies to CF’s 22.85% ROA (above industry average) and 37.64% ROI (above industry average). Valuation With fairly high growth estimates and historical data, there should be evidence of an overvalued company. However, this is not strictly the case. CF Industries has a forward P/E ratio of 19.86 and a price to sales ratio of 3.15 compared to the industry’s respective 24.84 and 4.65, which shows a relatively overvalued status. In comparison, the rest of the market cap competitors have ratios that higher than CF. Sigma-Aldrich has a forward price to earnings ratio of 22.59 and price to sales ratio of 3.34. What makes CF’s figures are more enticing is these competing firms aren’t growing so greatly as strongly as CF. CF can now be seen as both a growing and valued company. Moreover, CF has a relatively low PEG (2.34) ratio compared to other competitors’ numbers as well. Efficiency CF is efficient. Inventory turnover at 5.65 is strong compared to other industry market-cap rivals (PPG: 4.56). Moreover, asset turnover is also strong at 1.43 compared to competitor figures. Receivables turnover were at 21.65, but cash is not an issue for CF. In terms of liquidation, CF’s current ratio is at 1.54. This number is a bit risky, but the company’s capital expenditures have increased (31.92%) which means further increases in capacity and economies of scale may be present in the future, because of this financing. Moreover, institutions own 92.48% of all CF shares. Since the institutional investors have a larger gross amount of capital to lose compared to the retail investor, a high institutional percentage illustrates confidence in the stock's ability. The dividend rate of 0.24% is also high. Technical Analysis CF performed great in the past year. The company’s share price has increased 131.25% year-to-year. This type of growth is beautiful for a recessionary-type economy, especially considering the fact that the housing market and construction is doing so poorly. There seems to be some support at the 140 dollar share price range dating back to late May 2008. The last time CF reached this amount the company rebounded and appreciated 13%. There is a possibility a similar or better situation could occur in the future. More specific to the current month, CF illustrates strong technical signals. Parabolic SAR is below and upward trending the current share price. This event usually signals an upturn in share price. The company is a little undervalued compared to the RSI index at 43.12, but it is better to be an advocate of fundamental valuations before technical valuations. Therefore, while now isn't the most ideal time to purchase shares of CF according to technical analysis, purchasing shares will still produce strong long terms gains. Conclusion CF Industries is a great acquisition for any portfolio. The company's business model and fundamental analysis are both strong. It is very rare to find a company that has both strong valuation and growth, so it is wise to take advantage of these situations as they arise. -Dennis Biray July 18th, 2008 ©2008 BirayNetworks. All Rights Reserved

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A Financial Analysis of CF Industries

Introduction

CF Industries (CF) is an $8.61 billion company in the chemical manufacturing industry. Market capitalization competitors in this industry include PPG Industries, Sigma-Aldrich, and Celanese. The chemical manufacturing industry is down 24.62% over the past year compared to the S&P 500 which is down 18.66% during the same period. Over the past month, the industry has been down 29.30%, while the S&P 500 has been down 6.71%. Strong technical trends may be indicative of a continued expansion in this industry. Evidence comes from a potential turnaround in general equities. Moreover, as there seems to be evidence of confidence in equities, chemical manufacturing stocks like CF Industries will see future benefits. Also CF’s growth and valuation illustrate the potential for a strong earnings report next quarter.

Business

This section describes what CF Industries produces. According to Reuters, CF Industries “is a manufacturer and distributor of nitrogen and phosphate fertilizer products in North America.” The company bases its operations on two basic business segments. These two business segments include nitrogen fertilizer and phosphate fertilizer business. The Nitrogen fertilizer business focuses on producing ammonia, liquid urea, and UAN. This business focuses its operations in Canada and the United States. These are the same two locations for the phosphate fertilizer business. More specifically this business focuses on producing phosphate fertilizer used for transportation across the North American continent. The business segment CF operates with is growing very rapidly and still has the potential to grow even more, given the company’s core business model.

Growth

CF Industries has illustrated solid growth prospects over the past year. According to Reuters, CF Industries reported a $2.76 billion revenue product last year. This number is up over 41.49% than it was the previous year. Compared to the industry’s average of 25.83%, investors see the relative strength compared to other competitors. This number is higher than the company’s five year average of 22.14%. Moreover, competitor annual averages of 24.75% (PPG Industries) and 14.17% (Sigma-Aldrich) are lower than CF’s current figures. And given that CF’s five year average of 22.14% is higher than the industry’s five year average of 8.00%, this company has the potential to move even higher. CF’s earnings grew at a strong 301.64% last year—a number much higher than the industry average. Competitors such as Celanese only saw a 0.85% increase and PPG saw a disappointing increase in earnings of 12.87%. Therefore, both earnings and revenue growth is strong for CF Industries.

In addition, CF Industries has kept its costs under control. According to Reuters, CF has reported gross, operating, and net profit margins of 28.33%, 25.85%, and 15.98% respectively over the past year. Moreover, these numbers are above the industry averages of 26.76%, 16.39%, and 12.21% respectively. The numbers are also above or near the company’s five year average respective numbers of 13.06%, 9.46%, and 4.26%. This comparison illustrates a history of strong cost controls and positively-related consistency. The current averages are also better (business model respected) than competitor Celanese’s respective operating and net income averages of 11.52%, and 5.35%. The same comparison can be made for Sigma-Aldrich and PPG. Therefore, CF has proved to be a solid company in this industry. Its services are well-controlled cost wise, especially to direct market-cap competitors.

Compiling all this information together and investors comes across ROE. Over the past year, CF Industries reported an ROE of 43.66%. Therefore, out of all shareholder equity, more than 44% (near five year average) comes from earnings instead of debt or stock. This number is much stronger compared to the industry average of 11.02%, and the number is better than some competitor averages of 18.59% (PPG) and 20.21% (Sigma-Aldrich). Therefore, CF Industries has a history of strong earnings per its equity share—which reflects the strong capital gain movement over the past year. And if history is any indication, there should be no reason why CF Industries cannot continue its success. The same logic applies to CF’s 22.85% ROA (above industry average) and 37.64% ROI (above industry average).

Valuation

With fairly high growth estimates and historical data, there should be evidence of an overvalued company. However, this is not strictly the case. CF Industries has a forward P/E ratio of 19.86 and a price to sales ratio of 3.15 compared to the industry’s respective 24.84 and 4.65, which shows a relatively overvalued status. In comparison, the rest of the market cap competitors have ratios that higher than CF. Sigma-Aldrich has a forward price to earnings ratio of 22.59 and price to sales ratio of 3.34. What makes CF’s figures are more enticing is these competing firms aren’t growing so greatly as strongly as CF. CF can now be seen as both a growing and valued company. Moreover, CF has a relatively low PEG (2.34) ratio compared to other competitors’ numbers as well.

Efficiency

CF is efficient. Inventory turnover at 5.65 is strong compared to other industry market-cap rivals (PPG: 4.56). Moreover, asset turnover is also strong at 1.43 compared to competitor figures. Receivables turnover were at 21.65, but cash is not an issue for CF. In terms of liquidation, CF’s current ratio is at 1.54. This number is a bit risky, but the company’s capital expenditures have increased (31.92%) which means further increases in capacity and economies of scale may be present in the future, because of this financing. Moreover, institutions own 92.48% of all CF shares. Since the institutional investors have a larger gross amount of capital to lose compared to the retail investor, a high institutional percentage illustrates confidence in the stock's ability. The dividend rate of 0.24% is also high.

Technical Analysis

CF performed great in the past year. The company’s share price has increased 131.25% year-to-year. This type of growth is beautiful for a recessionary-type economy, especially considering the fact that the housing market and construction is doing so poorly. There seems to be some support at the 140 dollar share price range dating back to late May 2008. The last time CF reached this amount the company rebounded and appreciated 13%. There is a possibility a similar or better situation could occur in the future.

More specific to the current month, CF illustrates strong technical signals. Parabolic SAR is below and upward trending the current share price. This event usually signals an upturn in share price. The company is a little undervalued compared to the RSI index at 43.12, but it is better to be an advocate of fundamental valuations before technical valuations. Therefore, while now isn't the most ideal time to purchase shares of CF according to technical analysis, purchasing shares will still produce strong long terms gains.

Conclusion

CF Industries is a great acquisition for any portfolio. The company's business model and fundamental analysis are both strong. It is very rare to find a company that has both strong valuation and growth, so it is wise to take advantage of these situations as they arise.

-Dennis Biray
July 18th, 2008