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Hedge funds cut CF positions: CF’s shares may still perform well

Xun Yao Chen

Learning from hedge funds: CF Industries' 70% outperformance (Part 6 of 7)

(Continued from Part 5)

Share repurchases and asset expansion

While hedge funds such as Soros Management, Third Point, ValueAct, and Renaissance Technologies had cut positions in CF Industries Holdings, Inc. (CF), the company’s shares may still perform well. Share repurchases (buybacks) and asset expansions are two activities which tend to have positive impacts on stock prices.

Share repurchases

Share repurchases are positive because they reduce the number of shares outstanding. As the number of shares fall, earnings per share would rise, and the valuation would fall if the market doesn’t adjust the price to reflect new earnings per share.

In its latest filings, CF said it spent $1.4 billion buying back 7.3 million shares. At the end of 2012, CF had 62.96 million shares. On December 31, 2013, it had 56.73 million. At the end of 2013, with $1.7 billion remaining from the $3.0 billion share repurchase program approved by the board in 2012, CF could buyback another ~6.8 million shares based on average share price of $250. The company said it has already spent $300 million buying 1.2 million shares YTD in its annual filings.

Share count estimates

If CF Industries repurchases 6.8 million in 2014, its outstanding shares would fall to ~50 million. Because a company’s earnings per share are based on weighted average share counts for each quarter, the number of shares that analysts use to estimate earnings per share is somewhere between 56.73 million and 50 million. Based on Wall Street analysts’ earnings per share and net income estimates, CF Industries’ weighted average share count for 2014 is expected to average 54.24 million. Because the company’s earnings tend to be stronger during the first two quarters due to seasonality, an average of 54.24 million shares sounds more or less right, if not a little bit more than what you’d expect.

Continue to Part 7

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