CF Industries Holdings Inc (NYSE:CF) Presents a Compelling Case for Value Investors

The search for undervalued companies with solid basic financials is a foundation of value investing, a strategy established by Benjamin Graham and David Dodd nearly a century ago. This method involves finding stocks trading for less than their inherent worth, offering a possible safety buffer for investors. One way to find such possibilities is by looking for companies that display good valuation numbers together with acceptable scores in profitability, financial condition, and growth. This measured method helps steer clear of "value traps", stocks that seem inexpensive but are held back by poor fundamentals. A recent search for "decent value" stocks has identified CF Industries Holdings Inc (NYSE:CF) as a candidate for more detailed review.

Valuation Metrics

The main aim of value investing is to buy assets for less than their value, and CF's valuation numbers indicate it may meet this standard. The company's present valuation ratios seem appealing both on their own and when compared to its industry and the wider market.

• Price-to-Earnings (P/E) Ratio: CF's P/E ratio of 9.40 is much lower than the S&P 500 average of 26.15. Within the chemicals industry, this ratio is more inexpensive than 85% of similar companies.
• Forward P/E Ratio: Considering future estimates, the company's Price/Forward Earnings ratio of 10.99 remains noteworthy, being more appealing than 75% of industry rivals and notably under the S&P 500's forward P/E average of 36.12.
• Cash Flow and EBITDA Multiples: The stock also seems underpriced based on cash creation. CF is valued more cheaply than 91% of its industry according to its Price/Free Cash Flow ratio and more cheaply than 96% based on its Enterprise Value/EBITDA ratio.

These numbers are important for value investors as they give numerical proof that the market might be underestimating CF's earnings and cash flow capacity. A low P/E ratio, especially, can signal that a stock is priced low compared to the company's ability to generate profit.

Financial Health

A sound financial base is essential for a value investment, as it confirms the company can endure economic slowdowns and maintain operations without facing insolvency or liquidity problems. CF's financial condition score of 7 out of 10 indicates a strong balance sheet.

• Solvency: The company shows high solvency, with a Debt-to-Free-Cash-Flow ratio of 1.74. This means it could pay off all its debt in less than two years using its present cash flow, a number better than 91% of its industry counterparts.
• Liquidity: With a Current Ratio of 2.27 and a Quick Ratio of 1.99, CF has enough short-term assets to meet its short-term obligations, doing better than most companies in its field.
• Value Creation: A key favorable point is that CF's Return on Invested Capital (ROIC) is notably higher than its cost of capital, verifying that the company is producing real value for its shareholders.

This financial steadiness matches well with the value investing idea of looking for a safety buffer. A company with little debt and good liquidity is less prone to financial trouble, safeguarding the investor's capital.

Profitability Strength

While a low price is important, value investors also look for quality. A very profitable company selling at a discount is frequently a more attractive possibility. CF performs well here, receiving a high-level profitability score of 9 out of 10.

• Return Metrics: The company's Return on Equity (ROE) of 28.44% and Return on Assets (ROA) of 9.71% put it in the best 5% of its industry, showing outstanding efficiency in producing profits from its equity and assets.
• Strong Margins: CF's Profit Margin of 20.47% and Operating Margin of 31.03% are some of the highest in its sector, performing better than over 96% of rivals. These margins have also displayed an upward pattern, getting better in recent years.

High and consistent profitability is a sign of a company with a lasting competitive edge, a characteristic highly valued by value investors like Warren Buffett. It implies that the company's inherent worth is backed by its capacity to produce significant earnings.

Growth Prospects

For a value investment to achieve its potential, the company must have a feasible route for future expansion. CF's growth outlook is varied but displays encouraging past performance, receiving a medium score of 5 out of 10.

• Past Performance: The company has achieved notable historical growth, with Earnings Per Share (EPS) increasing by 36.27% over the previous year and by almost 25% on an annual basis over recent years. Revenue has also grown by 12.59% in the last year.
• Future Expectations: Analyst forecasts for future expansion are more reserved, with EPS and Revenue expected to increase about 4.5% and 3% each year, respectively. This signifies a reduction from the high growth levels of the past.

While the expected growth slowdown is something for investors to watch, the company's good past record offers a base. For a value investor, the current low valuation might already account for these more cautious growth forecasts, allowing for potential gain if the company performs better than them.

Conclusion

CF Industries offers a noteworthy case for investors using a value-focused method. The stock seems notably undervalued based on standard earnings and cash flow measures, while its very good profitability and sound financial condition indicate this is not a value trap but a fundamentally healthy business. The company's strong past growth, even with more restrained future outlooks, contributes to the investment argument. The mix of a low purchase price, strong financials, and high profitability forms a possible safety buffer that is central to the value investing approach. A complete summary of these basic scores is provided in the full ChartMill fundamental analysis report.

For investors looking for other possibilities that fit similar standards of good valuation, acceptable profitability, condition, and growth, more investigation can be performed using the predefined Decent Value Stocks screen on ChartMill.

Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation to buy or sell any security, or an endorsement of any investment strategy. All investments involve risk, including the possible loss of principal. Readers should conduct their own research and consult with a qualified financial advisor before making any investment decisions.