Long-term Targets
Precision is not yet finished with its M&A plans, and its robust cash generation should provide the financial support required to continue with this strategy. Management suggested that growth through acquisitions remains a primary focus for the company. As the company expands into significant opportunities, its management set a F2016 EPS goal of $15.50 to $16.50. The figure can approach $20 if additional M&A activity and the $750 million share repurchase are successful. Further tailwinds include the approval of the $750 million share buyback program, as well as $5 billion in free cash flow available to be deployed for additional acquisitions.
Considering the strong free cash flow generation, I opine that Precision will continue to grow with a large deal or collection of smaller deals. Management still has high efficiency to further increase the strategic value of the company and its shareholders.
CF Industries Holdings
Nitrogen – Not so favorable
The stock of CF Industries has outperformed (+135%) against its fertilizer peers (+34%) since the beginning of 2010. While elevated crop prices remain supportive to the strong Nitrogen demand, I think this scenario is going to change and Nitrogen will be replaced by Phosphorus & Potassium (P&K). I see more upside to P&K applications as farmers have the capacity to rebuild the P&K levels in the soil. Farmer incentives to apply nitrogen this spring will not be changed in the near term with corn prices already near $7.50/bu (bushel). As nitrogen prices appear to be bottomed out, NOLA (New Orleans Louisiana) urea prices continued at their low ($393-$410/st fob range last week) too. The company does not expect a repeat of the 1H12 price spike that drove NOLA urea prices to $700+/st fob (freight on board). Moreover, I also see some limitations in urea imports and we can anticipate a 5% y/y decline in nitrogen prices for 2013. I see more risk for nitrogen in the event of any weather-driven delays in planting and rotation of soybeans. This could affect the revenue margin of CF Industries. The aggregation of lower nitrogen prices, higher natural gas costs in 2013, low water levels in the Mississippi River, and the persistent drought in the corn-belt will drive a series of downward estimates.
Capital deployment likely to be a catalyst
Strong free cash flow generated over the past two years will bring significant returns to its shareholders. I believe management has effectively committed the integrity of its 2013-2016 cash from operations with the announcement of $3.8 billion for nitrogen capacity expansions, $3 billion in share repurchase, and $0.9 billion for pending M&A until 2016. This serves a limited scope for additional capital allocation announcements in 2013. In addition, management’s stated intention not to pursue a more comprehensive MLP strategy suggests limited scope for re-rating in the near-term. Therefore, currently I remain neutral for this stock.
Conclusion
To sum up, I feel Target Corporation and Precision Castparts provide a perfect opportunity to make long-term investment. Target will gain from its Red Card program and its entry into Canada, while Precision Castparts shall benefit from robust cash generation and heavy M&A activity. On the other hand, I remain skeptical about CF Industries performance considering their lack of infrastructure and operating experience. I will recommend a neutral rating for this stock.
The article How you Should Play With These Forward Picks? originally appeared on Fool.com and is written by Shweta Dubey.
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