CF Holdings: Betting On Expansion
CF Industries Holdings (NYSE:CF) is one of the largest manufacturers and distributors of nitrogen fertilizer and other nitrogen products in the world. The company’s core market and distribution facilities are concentrated in the midwestern United States and other major agricultural areas of the United States and Canada. Share prices have appreciated strongly over the past few years, on the order of 26% for each of the past two. I recently added it to my portfolio. This article covers the selection process and line of thinking that led to the decision.
Screening for Capex and Value
As an investor, I tend to dislike “one trick ponies.” CF Industries, after divesting most of its phosphate fertilizer business, is primarily a producer of nitrogen fertilizer, fundamentally dependent on US agricultural demand and the cost of natural gas. Given the predicted difficulties for agriculture in 2015, and the current cheapness of natural gas, I watched the name come up repetitiously on several screens that back-test well, and ultimately overcame my reservations and decided to invest on the basis of long-term potential.
In an effort to invest in companies that are investing in their own future growth, I’ve been screening for prospects that devote a substantial amount of cash flow to capex. The thinking is, that if the capex is well thought out it will be a tell for growth. CF comes up on most such screens, and ranks high on criteria assessing either value or financial strength.
At the same time, I’ve been looking at companies that are priced at less than 15x 7 year average EPS, inspired by Graham’s methods. While I have been unable to demonstrate the usefulness of this metric on a stand-alone basis in stock-picking, intuitively it seems desirable to buy at prices that are low compared to demonstrated earning capacity.
The current version of this screen uses a weighting approach, where the more recent years take a higher weight than the more distant past. In addition, it adjusts for share counts. CF has been very active buying back shares, which distorts the value of past EPS unless an adjustment is made. CF trades at less than 15x this metric, while ranking high on a Greenblatt inspired value system.