Is CF Industries Holdings Modestly Undervalued? An In-depth Valuation Analysis
CF Industries Holdings Inc (NYSE:CF) has experienced a daily loss of -3.19%, but over the past three months, the stock has gained 15.06%. The company's Earnings Per Share (EPS) stands at 12.08. Despite these fluctuations, is the stock modestly undervalued? This article conducts a detailed valuation analysis to answer this question. Read on to uncover the insights.
Introduction to CF Industries Holdings
CF Industries is a leading producer and distributor of nitrogen fertilizers with seven nitrogen facilities in North America. It also holds joint venture interests in the United Kingdom and Trinidad and Tobago. CF primarily uses low-cost U.S. natural gas as its feedstock, positioning it as one of the lowest-cost nitrogen producers globally. The company is also investing in carbon-free blue and green ammonia, which can be used as an alternative fuel to hydrogen or as a means to transport hydrogen.
CF Industries Holdings (NYSE:CF) is currently trading at $74.3 per share, while its estimated fair value, also known as the GF Value, stands at $90.61. This discrepancy suggests that the stock might be undervalued.
Understanding the GF Value
The GF Value is a proprietary valuation method that calculates the intrinsic value of a stock. This calculation is based on historical trading multiples, a GuruFocus adjustment factor based on past returns and growth, and future business performance estimates. The GF Value Line provides an overview of the fair value at which the stock should ideally be traded.
According to the GF Value, CF Industries Holdings appears to be modestly undervalued. The GF Value suggests that the stock's fair value is derived from historical multiples, the company's past business growth, and analyst estimates of future business performance. If the share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. Conversely, if the share price is significantly below the GF Value Line, the stock may be undervalued and have higher future returns.
Given that CF Industries Holdings is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth.
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Financial Strength of CF Industries Holdings
Investing in companies with poor financial strength carries a higher risk of permanent loss of capital. Therefore, it's crucial to review a company's financial strength before deciding to buy its stock. A great starting point for understanding the financial strength of a company is looking at the cash-to-debt ratio. CF Industries Holdings has a cash-to-debt ratio of 0.99, better than 58.19% of 232 companies in the Agriculture industry. GuruFocus ranks the overall financial strength of CF Industries Holdings at 7 out of 10, indicating fair financial strength.
Profitability and Growth of CF Industries Holdings
Investing in profitable companies, especially those with consistent profitability over the long term, is less risky. A company with high profit margins is usually a safer investment than those with low profit margins. CF Industries Holdings has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $8.70 billion and Earnings Per Share (EPS) of $12.08. Its operating margin is 41.09%, ranking better than 95.61% of 228 companies in the Agriculture industry. Overall, the profitability of CF Industries Holdings is ranked 9 out of 10, indicating strong profitability.
Growth is probably one of the most important factors in the valuation of a company. If a company's business is growing, it usually creates value for its shareholders, especially if the growth is profitable. Conversely, if a company's revenue and earnings are declining, the value of the company will decrease. CF Industries Holdings's 3-year average revenue growth rate is better than 83.41% of 217 companies in the Agriculture industry. Its 3-year average EBITDA growth rate is 53.9%, ranking better than 83.98% of 206 companies in the Agriculture industry.
ROIC vs WACC Comparison
Another method of determining the profitability of a company is to compare its return on invested capital (ROIC) to the weighted average cost of capital (WACC). ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, CF Industries Holdings's ROIC is 28.16, and its cost of capital is 10.01.
Conclusion
Overall, CF Industries Holdings (NYSE:CF) stock appears to be modestly undervalued. The company's financial condition is fair, and its profitability is strong. Its growth ranks better than 83.98% of 206 companies in the Agriculture industry. To learn more about CF Industries Holdings stock, you can check out its 30-Year Financials here.
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This article first appeared on GuruFocus.
