A stock pick for the coming corn boom

The biggest planting season since 1937 will drive profits for the leading maker of nitrogen fertilizer.

By MoneyShow.com Apr 3, 2012 4:00PM

By Igor Greenwald, MoneyShow.com


The last time US farmers were preparing to plant this much corn, nylon was just invented and the first Social Security benefits recently paid, amid warnings from Father Charles Coughlin that the New Deal would lead to a dictatorship.


Of course, yields per acre in 1937 were less than a fifth of what they are today. But domestic demand was a lot lower as well, China was not a major importer, and 40% of the corn crop wasn’t earmarked for burning as ethanol.


One reason yields are so much higher now is the heavy use of nitrogen as fertilizer. So the upgraded plantings forecast issued Friday by the US Department of Agriculture meant only one thing for leading nitrogen producer CF Industries Holdings (CF). It’s going to make a killing over the next couple of months selling ammonia and its derivatives to corn farmers.


The stock ticked up not quite 2% on the news, still stuck in a two-month trading range. CF’s failure to break out to new highs after the most lucrative year in its history—and, now, proof that another’s on the way—shows persistent skepticism that the good times will last.


They may not. Corn planting won’t remain twice as profitable as soybeans forever, and in fact, December corn futures are trading at a 17% discount to May’s in anticipation of a bumper crop this fall.


Meanwhile, natural gas that is nitrogen fertilizer’s main feedstock won’t stay at ten-year lows forever. Some of the acreage added to corn will also have to revert to soybeans down the line to replenish the soil and protect future yields.


Fertilizer is a highly cyclical commodity. New ammonia production plants will come online in the next year, notably in the Middle East, boosting supply. And if corn gets sufficiently expensive, we might stop wasting so much of it on ethanol, which would lower demand for nitrogen.


So that’s why shares are priced at eight times the 2012 earnings estimates, which are likely too low. That’s why CF can be bought at six times last year’s free cash flow and four times its earnings before interest, taxes, depreciation, and amortization—a common benchmark of a company’s value in a buyout.


Last year, CF, a $12 billion company, paid down nearly $1 billion of debt and bought $1 billion of its own stock at a fat discount to the current price. This year is looking even more lucrative, with fertilizer prices popping in response to heavy planting and an early spring.


And CF didn’t presell a lot at seasonal lows late last year, leaving itself fully exposed to the current spike in demand.


Longer term, it is the lowest-cost domestic producer in a market already 50% dependent on exports, and in an age where growing global food demand will drive increased fertilizer use.


CF’s distribution network of pipelines, terminals, and storage depots is an undervalued asset that would be very difficult to replicate. It’s positioned to produce profitably in a much less friendly market environment, and yet could actually see its current 50% margins jump next year if natural gas stays cheap as its hedges run out.


In fact, whenever I hear that Warren Buffett is looking for more buyout targets, I can’t help but think that one of the better ones is right under his nose, making Nebraska’s corn grow. But CF doesn’t need Buffett’s cash. It’s generating more than enough of its own to reward shareholders.


(You can find my previous column on the company here.)

Tags: CF
0Comments

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

124
124 rated 1
279
279 rated 2
471
471 rated 3
714
714 rated 4
642
642 rated 5
604
604 rated 6
614
614 rated 7
450
450 rated 8
303
303 rated 9
115
115 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
ARCPAMERICAN REALTY CAPITAL PROPERTIES Inc10
BIDUBAIDU Inc10
CITCIT GROUP Inc NEW10
HPQHEWLETT PACKARD CO10
ITUBITAU UNIBANCO BANCO MULTIPLO S.A.10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.