Earnings

Critical Comparison: CF Industries Holdings, Inc. (CF) vs. Monsanto Company (MON)

CF Industries Holdings, Inc. (NYSE:CF) shares are up more than 14.90% this year and recently increased 2.41% or $0.85 to settle at $36.17. Monsanto Company (NYSE:MON), on the other hand, is up 12.73% year to date as of 11/15/2017. It currently trades at $118.60 and has returned 1.07% during the past week.

CF Industries Holdings, Inc. (NYSE:CF) and Monsanto Company (NYSE:MON) are the two most active stocks in the Agricultural Chemicals industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.

Growth

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect CF to grow earnings at a 43.01% annual rate over the next 5 years. Comparatively, MON is expected to grow at a 8.00% annual rate. All else equal, CF’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 27.91% for Monsanto Company (MON). CF’s ROI is 0.40% while MON has a ROI of 17.80%. The interpretation is that MON’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 +0.17. Comparatively, MON’s free cash flow per share was +4.29. On a percent-of-sales basis, CF’s free cash flow was 1.08% while MON converted 12.9% of its revenues into cash flow. This means that, for a given level of sales, MON is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. CF has a current ratio of 1.70 compared to 1.40 for MON. This means that CF can more easily cover its most immediate liabilities over the next twelve months. CF’s debt-to-equity ratio is 1.83 versus a D/E of 1.26 for MON. CF is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

CF trades at a forward P/E of 158.64, a P/B of 2.66, and a P/S of 2.16, compared to a forward P/E of 19.03, a P/B of 8.10, and a P/S of 3.56 for MON. 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 isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. CF is currently priced at a -1.04% to its one-year price target of 36.55. Comparatively, MON is -5.22% relative to its price target of 125.13. This suggests that MON is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.60 for CF and 2.50 for MON, which implies that analysts are more bullish on the outlook for CF.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. CF has a beta of 1.17 and MON’s beta is 1.06. MON’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. CF has a short ratio of 6.20 compared to a short interest of 1.18 for MON. This implies that the market is currently less bearish on the outlook for MON.

Summary

Monsanto Company (NYSE:MON) beats CF Industries Holdings, Inc. (NYSE:CF) on a total of 10 of the 14 factors compared between the two stocks. MON is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. MON is more undervalued relative to its price target. Finally, MON has better sentiment signals based on short interest.

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