CF Industries Holdings, Inc. Fundamental Analysis
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CF Industries Holdings, Inc.
Last Updated: 1 Dec 2023
NYSE: CF
GICS Sector: Basic Materials
Sub-Industry: Agricultural Inputs
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Table of Contents
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Management
CEO: Tony Will
Tenure: 9.8 years
CF Industries Holdings, Inc.'s management team has an average tenure of 5.5 years. It is considered experienced.
Source of Revenue
CF Industries Holdings, Inc. manufactures and sells hydrogen and nitrogen products with the mission to provide clean energy to feed and fuel the world. Such end products include energy, fertiliser, emissions abatement, and other industrial activities.
The company’s approach to cleaner manufacturing is through the production of green and blue ammonia. Ammonia is one of the most efficient ways to transport and store hydrogen and is also fuel on its own.
The approach includes green ammonia production, which refers to ammonia produced through a carbon-free process, and blue ammonia production, which relates to ammonia produced by conventional processes but with CO2 removed through carbon capture and sequestration (CCS) and other certified carbon abatement projects.
CF Industries Holdings’ principal customers are cooperatives, independent fertiliser distributors, traders, wholesalers, and industrial users.
The company’s core product is anhydrous ammonia (ammonia), which contains 82% nitrogen and 18% hydrogen.
Nitrogen products that are upgraded from ammonia are granular urea, urea ammonium nitrate solution (UAN) and ammonium nitrate (AN).
Other nitrogen products include diesel exhaust fluid (DEF), urea liquor, nitric acid, and aqua ammonia, which are sold primarily to industrial customers, and compound fertiliser products (NPKs), which are solid granular fertiliser products for which the nutrient content is a combination of nitrogen, phosphorus, and potassium.
The company has five reportable segments: Ammonia, Granular urea, UAN, AN and Other. These segments are differentiated by their products. Other segment products primarily include DEF, urea liquor, nitric acid, and aqua ammonia.
CF Industries Holdings has its internal marketing and sales force that generates most of the sales.
Although CHS was the company’s largest customer in 2022 and accounted for approximately 13% of its consolidated net sales, CF Industries Holdings has a strategic venture with CHS under which CHS has a minority equity interest in CF Industries Nitrogen, LLC.
CF Industries Holdings, Inc. Reportable Segment Revenue FY2022
CF Industries Holdings, Inc. Economic Moat
CF Industries Holdings, Inc. Economic Moat
Economic Moat: None
There are many ways to identify CF Industries Holdings, Inc.’s economic moat, but I focus on the above 5 types. The rating is purely subjective and based on my in-depth understanding and analysis of CF Industries Holdings, Inc.. Please check my summary to understand more about the economic moat.
Performance Checklist
Is CF Industries Holdings, Inc.’s revenue growing YoY for the past 5 years consistently? Yes.
Is the net income growing YoY for the past 5 years consistently? Yes.
Is the cash flow from operating activities growing YoY for the past 5 years consistently? Inconsistent.
Is the free cash flow positive for the past 5 years? Yes.
Is the gross margin % consistent/ growing for the past 5 years? Yes.
Is the EPS growing for the past 5 years? Yes.
CF Industries Holdings, Inc. Revenue, Net Income, Operating Cash Flow, and FCF (USD Million)
Is the free cash flow per share growing for the past 5 years? Yes.
CF Industries Holdings, Inc. FCF per Share
Management Effectiveness
Is CF Industries Holdings, Inc.’s ROE consistently at 12%-15% YoY for the past 5 years? Inconsistent.
CF Industries Holdings, Inc. Return on Equity
Is the ROIC consistently at 12%-15% YoY for the past 5 years? Inconsistent.
CF Industries Holdings, Inc. Return on Invested Capital vs Weighted Average Cost of Capital
The trendline for the number of shares outstanding is declining, which is something that an investor would be pleased to see.
CF Industries Holdings, Inc. Shares Outstanding (Million Shares)
CF Industries Holdings, Inc. Financial Health
CF Industries Holdings, Inc. Financial Health (USD Million)
Current Ratio: 4.5 (pass my requirement of >1.0)
Debt-to-EBITDA: 0.8 (pass my requirement of <3.0)
Interest Coverage: 36.3 (pass my requirement of >3.0)
Debt Servicing Ratio: 2.9% (pass my requirement of <30.0%)
Dividend
Current Dividend yield: 2.1%
Have the dividend payments been stable for the past 5 years? Yes.
Have the dividend payments been growing for the past 5 years? Yes.
CF Industries Holdings, Inc.’s dividend payments are reasonably covered by its earnings and cash flows.
CF Industries Holdings, Inc. Intrinsic Valuation
Estimated intrinsic value: $172.74
Value is calculated using the discounted cash flow method (taking into account their cash and debt) and scenario planning.
Average free cash flow used: USD$2,200M
Projected growth rate: 5%
Beta: 1.0
Discount rate: 8.0%
Margin of safety: 40% (Uncertainty: High)
Price range after the margin of safety: <$103.00
Date of calculation: 1 Dec 2023
CF Industries Holdings, Inc. Valuation
Free cash flow used is a weighted average that is rounded to the nearest tens. In some instances, I used a more realistic number to represent the free cash flow.
Total debt and cash and short-term investments are last quarter figures that are rounded to the nearest tens. In some instances, I used more realistic numbers to represent them.
CF Industries Holdings, Inc. Intrinsic Valuation
CF Industries Holdings, Inc. Relative Valuation
CF Industries Holdings, Inc. EV-to-EBITDA vs its peers
CF Industries Holdings, Inc. Price-Earnings Ratio vs its peers
CF Industries Holdings, Inc. Historical Price-Earnings Ratio
Additional Resources
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My Top Concern
The selling prices of such commodities have historically fluctuated in response to supply and demand conditions.
The need for nitrogen depends on things like how much land is used for growing crops, the types of crops grown, and how much fertilizer is used. It's driven by more people, the economy growing, changes in what people eat, and using crops for things like making fuel. Industries also use nitrogen for making chemicals and reducing emissions, like in diesel vehicles.
Supply is affected primarily by available production capacity and operating rates, raw material costs and availability, energy prices, government policies and global trade.
During periods of industry oversupply, selling prices typically decline, resulting in reduced profit margins, write-downs in the value of inventory and temporary or permanent curtailments of production. This can affect the financial position of CF Industries Holdings.
For example, in 2016 and 2017, CF Industries Holdings’ financial performance and credit ratings were negatively impacted by the lower selling prices resulting from the global oversupply of nitrogen fertiliser.
Due to the cyclical nature of the industry, nobody can predict the timing of oversupply and undersupply conditions, the period that these conditions will persist or the degree to which oversupply conditions will impact the business, financial condition, results of operations and cash flows.
Next, just like most commodities, there is little or no product differentiation, and customers make their purchasing decisions primarily based on the delivered price and, to a lesser extent, customer service and product quality. This means CF Industries Holdings is subject to price competition from global competitors, which may affect its profitability.
Lastly, the business is dependent on natural gas, which is subject to price volatility.
Summary for CF Industries Holdings, Inc.
As with most commodity or basic material producers, it is difficult to build an economic moat. The industry is intensely competitive, primarily based on delivered price and, to a lesser extent, on customer service and product quality.
There is almost no network effect or switching cost. Although the most common switching costs are monetary, there are also psychological, effort-based, and time-based switching costs. Using this framework, customers will not incur any psychological or much effort and time to switch from one producer to another. Henceforth, the other area where CF Industries Holdings can build its moat is cost advantage. Unfortunately, the company excels only in cost advantage, but trends show that this may not be the case in the future.
While having a cost advantage due to low-cost natural gas inputs, the company's recent capacity expansions, costing $5.2 billion, have significantly increased its capital base. However, these expansions are not anticipated to generate economic profits due to the projection of nitrogen fertilizer prices remaining closer to current levels, compared to higher prices in the past.
Furthermore, Chinese producers' adoption of more efficient coal plants and natural gas has flattened the cost curve.
As cost advantage is the only moat that CF Industries Holdings has, overall, the company does not possess any economic moat.
CF Industries Holdings has demonstrated commendable consistency and growth in various aspects of its performance over the past five years.
The company has exhibited consistent year-over-year (YoY) revenue growth, showcasing a robust and upward trajectory. Similarly, the net income has steadily increased YoY, underlining the company's financial stability and profitability.
However, while the free cash flow remained positive throughout these years, the consistency in the cash flow from operating activities was somewhat inconsistent. Despite this, the company has managed to grow its gross margin percentage consistently over the past five years. Moreover, the EPS has shown a positive trend, consistently growing during this period.
CF Industries Holdings has displayed some variability in its ROE and ROIC over the past five years, with fluctuations outside the 12%-15% range year-over-year. Despite this inconsistency, the ROE has consistently surpassed the industry averages. Moreover, the ROIC has consistently exceeded the company's WACC, signifying efficient capital utilization.
The trend of declining outstanding shares indicates a positive move for investors, as it suggests a reduction in dilution and a potential for increased earnings per share over time.
CF Industries Holdings exhibits robust financial health based on key metrics. With a current ratio of 4.5, the company showcases a strong ability to cover its short-term liabilities with its current assets. Additionally, its debt-to-EBITDA ratio indicates a manageable level of debt to its earnings.
The interest coverage ratio of 36.3 signifies the company's capacity to comfortably cover interest expenses with its operating income, exceeding the 3.0 threshold. Furthermore, the debt servicing ratio at 2.9% is well below the 30.0% threshold, highlighting the company's efficient management of debt payments relative to its income.
Investing in CF Industries Holdings might pose challenges despite a healthy balance sheet due to certain aspects.
The company lacks a distinct economic moat, potentially impacting its competitive advantage. Furthermore, its unsatisfactory performance and capital allocation strategies may raise concerns about sustained growth.
Although the balance sheet appears healthy, considering the significant uncertainty surrounding the company, investing in CF Industries Holdings demands a high margin of safety, preferably around 40%. This cautious approach helps mitigate risks associated with the uncertain nature of the company's performance and capital allocation, ensuring investors have a substantial buffer against any unexpected downturns or challenges.
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