Business

A Side-by-side Analysis of CF Industries Holdings, Inc. (CF) and BHP Billiton Limited (BHP)

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CF Industries Holdings, Inc. (NYSE:CF) shares are up more than 3.74% this year and recently decreased -0.65% or -$0.29 to settle at $44.13. BHP Billiton Limited (NYSE:BHP), on the other hand, is up 11.37% year to date as of 08/01/2018. It currently trades at $51.22 and has returned 1.29% during the past week.

CF Industries Holdings, Inc. (NYSE:CF) and BHP Billiton Limited (NYSE:BHP) are the two most active stocks in the Agricultural Chemicals industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.

Growth

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Comparatively, BHP is expected to grow at a 5.30% annual rate. All else equal, BHP’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. CF Industries Holdings, Inc. (CF) has an EBITDA margin of 28.49%. This suggests that CF underlying business is more profitable CF’s ROI is 3.10% while BHP has a ROI of 8.70%. The interpretation is that BHP’s business generates a higher return on investment than CF’s.

Cash Flow

The amount of free cash flow available to investors is ultimately what determines the value of a stock. CF’s free cash flow (“FCF”) per share for the trailing twelve months was +0.61. Comparatively, BHP’s free cash flow per share was -. On a percent-of-sales basis, CF’s free cash flow was 3.45% while BHP converted 0% of its revenues into cash flow. This means that, for a given level of sales, CF is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. CF has a current ratio of 2.70 compared to 1.70 for BHP. This means that CF can more easily cover its most immediate liabilities over the next twelve months. CF’s debt-to-equity ratio is 0.00 versus a D/E of 0.49 for BHP. BHP is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

CF trades at a forward P/E of 23.96, a P/B of 2.87, and a P/S of 2.55, compared to a forward P/E of 20.93, a P/B of 2.39, and a P/S of 3.30 for BHP. CF is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. CF is currently priced at a 0.05% to its one-year price target of 44.11. Comparatively, BHP is 13.9% relative to its price target of 44.97. This suggests that CF is the better investment over the next year.

Risk and Volatility

To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. CF has a beta of 0.95 and BHP’s beta is 1.20. CF’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. CF has a short ratio of 4.99 compared to a short interest of 6.91 for BHP. This implies that the market is currently less bearish on the outlook for CF.

Summary

CF Industries Holdings, Inc. (NYSE:CF) beats BHP Billiton Limited (NYSE:BHP) on a total of 9 of the 14 factors compared between the two stocks. CF is more profitable, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. CF is more undervalued relative to its price target. Finally, CF has better sentiment signals based on short interest.

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