market folly

We're posting up notes from the Sohn London Investment Conference 2015.  Next up is Passport Capital's John Burbank who pitched a long of CF Industries (CF).


John Burbank's Sohn London Presentation 2015

Long CF Industries (CF) 

Burbank said that he is generally very bearish on commodities but he likes CF industries for the following reasons.

- They know CF well and have been researching them for at least two year’s.

- CF is the leader in nitrogen fertilizers. The nitrogen fertilizer business is better than the potash business because farmers have to apply it to the soil.

- CF made two good deals in 2015. CF is buying OCI which is listed in the Netherlands. It will give CF a 50% share of the US nitrogen fertilizer business.  Owning a large share of the market will allow CF to charge higher prices. Buying Netherlands based OCI enables a tax inversion which will reduce CF’s tax rate from 35% to between 20-25%. The CF OCI deal should close in mid-2016. The other good deal that CF has done in 2015 is to allow its largest customer, CHS Co-Op, to buy 9% of it shares at $107/ share or $2.8bn. That’s more than double the current stock price. Burbank thinks that CF will use the money to buy back stock. He also believes that analysts have been slow to recognise that the deals will lead to 25% extra product capacity.

- CF is a shareholder friendly company with a long history of share buybacks. Capital returns in dividends and buybacks have been running at 10% per year since 2011. They have reduced the shares by 35% since 2012. Executives are net buyers rather than net sellers of the stock.  Burbank said that CF stock may not do anything for the next four to five months. Then the deals will close, the big buyback will happen and the stock price will go up.

What can go wrong? Burbank thinks that China will devalue. “If China devalues everything in the World will go down in value.” CF’s earnings will get hit too by about 7%. Passport has bought CF against a basket of commodity shorts. They are hedging the downside risk in non-miner, CF, by being short potash miners like Potash Corp (POT), Mosaic (MOS) and Agrium (AGU).

Be sure to check out the rest of the Sohn London Conference presentations.