John H. Burbank III is the Chief Investment Officer of Passport Capital LLC, the global investment firm he founded in 2000. The firm now manages a portfolio worth more than $3.5 billion. The San Francisco-based firm employs top-down macroeconomic to achieve risk-adjusted returns. CF Industries (CF, Financial) is the largest holding of Passport Capital. As of December 31, 2014, the firm was holding 1,082,292 shares of CF industries and 1,250,000 call options on the stock.
In his latest investor letter, John Burbank (Trades, Portfolio) explained his investment thesis on CF Industries. Below is the excerpt from his investor letter:
" CF manufactures and distributes nitrogen fertilizer products primarily in North America and had a $13.6 billion market capitalization at quarter-end. The company benefits from cheap US natural gas prices, relative to competitors using expensive gas in Europe and coal in China. Additionally, CF recently appointed a new CEO who appears to be quite interested in delivering value to shareholders. We believe the company will follow through announced plans to return capital to investors via share repurchases and increasing dividends. Since the end of 2011, CF has reduced share count by approximately 30%. Currently, the company has authorized a one-billion dollar stock buy-back program, which may be expanded in size with a potential new debt offering. Additionally, the dividend has increased from $0.40 per year in early 2011 to an annualized amount of $6.00 in the third quarter of 2014. This is an important secular change in corporate governance. We expect even more capital returns to shareholders as they expand their production capacity by 25% due on-line in early 2016.
Nitrogen fertilizer prices remain in middle of their long term average. Currently, multiple production outages at competitors in other countries have kept nitrogen prices at mid-cycle levels. These outages are mostly structural in nature due to declining natural gas reserves, politics or war. We believe this should be accretive to EPS going forward.
We also believe CF is going to consider introducing MLP structures, which could have the effect of enabling collective corporate assets to trade at much higher valuations."
CF industries, along with its other fertilizer peers, Mosaic and Agrium , have seen good gains this year. While CF Industries stock price is up 11%, shares of Mosaic and Agrium are up 10% and 19%, respectively. Another billionaire investor George Soros (Trades, Portfolio) has also increased his stake in the company last quarter. CF Industries is trading at 13.6 times FY2015 EPS estimates. The company has a forward annual dividend yield of 1.90%. Out of 22 analysts covering the company, 14 have buy ratings, 7 have hold ratings and one has a sell rating.
