CF Industries (CF): 2012 Is Not the Peak; Stock worth $305/share – Don Carson

Susquehanna uber-analyst Don Carson is making a big call on CF Industries (NYSE:CF) raising his price target to a Street high of $305 (prev. $240).

– His new price target represents ~48% upside from current levels.

Susquehanna is raising their 2012/13 EPS to $27.70/$28.00 from $26.70/$21.25 and their 12-month price target to $305 from $240. They now see 2013 EPS above 2012 driven by an improved nitrogen pricing outlook in 2013 due to elevated grain prices leading to increased acreage planted and N demand, a minimum of $2.00 in EPS accretion from the acquisition of the minority stake in the cost-advantaged Medicine Hat, Alberta N plant, and the benefits of a lower share count due to share repurchase. Firm notes they had lowered their target multiple on Nitrogen segment EBITDA to 5.0x from 6.0x following the lack of share repurchases in Q1, but are reverting back to the 6.0x multiple used for other N producers in firm’s coverage universe which accounts for $47 of the $65/share price target increase.

* Also note that Morgan Stanley is raising their price target to $250 (prev. $215) noting they expect consistent, measured, share repurchases, absent market dynamics that would encourage more aggressive action. Over time, they expect the consistency of this process to be viewed similar to a dividend, likely leading to a narrowing of CF’s significant valuation gap with nitrogen MLPs.

Investment Case
While some investors are questioning what’s next for CF now that the capital allocation debate has come to a very positive conclusion, Morgan Stanley challenges investors to find a more attractive equity investment. CF Industries:

1. Has a sustainable feedstock cost advantage and is positioned in the highest nitrogen price end market in the world;

2. Unequivocally benefits from recent trends in US agriculture. The US farmer will likely plant as much if not more corn in 2013 as in 2012 and he will buy nitrogen, no ifs ands or buts;

3. Has almost zero exposure to Europe from a sales perspective and developments in Greece, Spain et al will not change corn or nitrogen supply / demand dynamics;

4. Is in the process of a substantial recapitalization through share repurchases that minimizes the risk of share price downside;

5. Will grow through highly accretive low risk tack on M&A and low risk / high reward brownfield projects offsetting risk of the nitrogen cycle “peaking” and making an ultimate “soft landing” that much more likely; and

6. Trades at a very undemanding ~4-times EBITDA.

MSCO’s Bull Case target moves to $300.

Notablecalls: Don Carson is the Axe in the space. Back in the day he was voted Institutional Investor’s #1 analyst in his space for 6 consecutive years. People still very much listen to what he has to say.

With Carson out with a new Street high target the stock is off to the races, I believe. Just take a look at the chart – it’s so close to a breakout.

The comments from MSCO are also very encouraging.

I’m thinking $210+ today. Possibly much higher in the coming weeks.

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