CF Industries Stock Has A 20% Upside Driven By Higher Demand For Nitrogen Fertilizer

by Trefis Team
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We believe that CF Industries stock (NYSE: CF) has an upside potential of 22% in the near term. CF trades at $32 currently and it has lost 22% in value year-to-date. It traded at a pre-Covid high of $39 in February and is 18% below that level now. Also, CF stock has gained 47% from the lows of $22 seen in March 2020, after the multi-billion dollar stimulus package announced by the U.S. government which has helped the stock market recover to a large extent. The stock is lagging the broader markets (S&P 500 is up about 60%), as investors are cautious about the impact of economic uncertainty on the fertilizer industry, in general. 

The company is a Global Leader in Nitrogen Fertilizer Manufacturing and Distribution. Despite the Covid-19 crisis, it has managed to conduct its operations smoothly and there was no meaningful impact in customer demand either, as fertilizers and farming-related activities are classified under essential businesses. CF reported an increase in Fertilizer sales volume for the first nine months on a year-on-year basis; however, its net sales were down 15% due to a slow third quarter driven by the seasonal nature of fertilizer applications in the Northern Hemisphere. Moving forward, the company is likely to benefit from higher nitrogen fertilizer demand in major markets – Global nitrogen requirements are driven by demand in India and Brazil. The company expects global nitrogen demand to remain positive in the second half of 2020 and into 2021. Despite some rise in CF stock since late March, we believe that the stock has room for growth in the near future. Our conclusion is based on our detailed analysis of CF Industries’ stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.

2020 Coronavirus Crisis

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • From 3/24/2020: S&P 500 recovers 62% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here’s how CF and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in the S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of the S&P 500 index
  • 1/1/2010: Initial recovery to levels before the accelerated decline (around 9/1/2008)

CF Industries vs S&P 500 Performance Over 2007-08 Financial Crisis

CF stock declined from levels of around $15 in October 2007 (the pre-crisis peak) to roughly $13 in March 2009 (as the markets bottomed out), implying that the stock lost around 15% of its value from its approximate pre-crisis peak. This marked a smaller drop than the broader S&P, which fell by about 51%.

However, CF recovered strongly post the 2008 crisis to about $18 in early 2010 – rising by 41% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period. 

CF Industries’ Fundamentals in Recent Years Look Strong

CF Industries revenues grew 7% from $4.3 billion in 2015 to $4.6 billion in 2019. However, the company’s net income decreased from $734 million to $646 million over the same period, mainly driven by higher cost of sales and selling, general and administrative expenses. The company’s Q3 2020 revenues were 18% below the year-ago period, and its EPS figure decreased from $0.29 to -$0.13.

Does CF Industries Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

CF Industries’ total debt decreased from $5.8 billion in 2016 to $4 billion at the end of Q3 2020, while its total cash decreased from $1.2 billion to around $553 million over the same period. The company generated around $941 million in cash from its operations in the first three quarters of 2020, and it appears to be in a good position to weather the crisis.

CONCLUSION

Phases of Covid-19 crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with the gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • July-November 2020: Weak Q2 and Q3 results, but continued improvement in demand and progress with vaccine development buoy market sentiment

Keeping in mind the trajectory over 2009-10, this suggests a potential recovery to around $39 (22% upside) once economic conditions begin to show signs of improving. This marks a full recovery to the $29 level CF Industries’ stock was at before the coronavirus outbreak gained global momentum.

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

 

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