Is CF Industries Holdings, Inc.’s (NYSE:CF) Cash Outlook Optimistic?

Two important questions to ask before you buy CF Industries Holdings, Inc. (NYSE:CF) is, how it makes money and how it spends its cash. This difference directly flows down to how much the stock is worth. Operating in the industry, CF Industries Holdings is currently valued at US$9.4b. I will take you through CF Industries Holdings’s cash flow health and the risk-return concept based on the stock’s cash flow yield, using the most recent financial data. This will help you think about the company from a cash perspective, which is a crucial factor to investing.

View our latest analysis for CF Industries Holdings

What is CF Industries Holdings’s cash yield?

CF Industries Holdings’s free cash flow (FCF) is the level of cash flow the business generates from its operational activities, after it reinvests in the company as capital expenditure. This type of expense is needed for CF Industries Holdings to continue to grow, or at least, maintain its current operations.

The two ways to assess whether CF Industries Holdings’s FCF is sufficient, is to compare the FCF yield to the market index yield, as well as determine whether the top-line operating cash flows will continue to grow.

Free Cash Flow = Operating Cash Flows – Net Capital Expenditure

Free Cash Flow Yield = Free Cash Flow / Enterprise Value

where Enterprise Value = Market Capitalisation + Net Debt

CF Industries Holdings’s yield of 2.78% indicates its sub-standard capacity to generate cash, compared to the stock market index as a whole, accounting for the size differential. This means investors are taking on more concentrated risk on CF Industries Holdings but are not being adequately rewarded for doing so.

NYSE:CF Balance Sheet Net Worth, March 1st 2019
NYSE:CF Balance Sheet Net Worth, March 1st 2019

Does CF Industries Holdings have a favourable cash flow trend?

Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at CF Industries Holdings’s expected operating cash flows. Over the next three years, CF Industries Holdings is expected to deliver a decline in operating cash flow compared to the most recent level, which is not an encouraging sign. Below is a table of CF Industries Holdings’s operating cash flow in the past year, as well as the anticipated level going forward.
Current +1 year +2 year +3 year
Operating Cash Flow (OCF) US$1.5b US$1.5b US$1.7b US$1.5b
OCF Growth Year-On-Year -1.4% 15% -14%
OCF Growth From Current Year 13% -2.0%

Next Steps:

Although its positive operating cash flow, and high future growth, is appealing, the low free cash flow yield is unattractive. This is because you would be better compensated in terms of cash yield, by investing in the market index, as well as take on lower diversification risk. However, cash is only one aspect of investing. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. You should continue to research CF Industries Holdings to get a better picture of the company by looking at:

  1. Valuation: What is CF worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether CF is currently mispriced by the market.
  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on CF Industries Holdings’s board and the CEO’s back ground.
  3. Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.