Thread by @Plum_Capital

Good summary and discussion from @QuisitiveInvest @austinhankwitz. I agree with the thesis, and believe that fertilizer stocks are severely undervalued. I own some $CF (small position) and $UAN (massive position). Quick thread for anyone interested... 🧵👇

https://twitter.com/QuisitiveInvest/status/1420054760833658882

There's much said about macro in the public domain so I'll be brief - macro situation cannot be better, with the price of corn high, and stocks at very low levels across the globe. Production in Brazil is weak, and some US crop looks shaky as well from intermittent bad weather

While cost curve has really shifted because feedstock prices in China and Europe have gone up significantly (anthracite coal and natural gas). US is a net importer of nitrogen fertilizer, so this is highly supportive of domestic prices in the US...

Obviously when the price of corn is high, farmers are less sensitive to the rise in fertilizer prices. Yet supply is fixed in the US, very little increase in nitrogen production capacity since 2016 or so. So prices tend to be highly volatile based on supply/demand dynamics

And these businesses have incredible operating leverage when prices rise - all flows to the bottom line. So the bet here is that strong prices will be sustained for the next few years, given low global corn stocks, high input costs abroad and limited capex investment...

And these companies are literally minting money at current prices. For example, depending on what your EBITDA estimate is, $CF might generate close to 15% LFCF yield on equity this year. Not too shabby for a large cap stock (~$10bn market cap)

However, I don't think $CF is the best bet in the space. Problem is, given the size here there is heavy index/passive ownership. So the stock price is arguably more tied to fund flows than fundamentals in the near term...

Yes fundamentals should trump technicals over a longer time horizon. But not difficult to see $CF crush earnings and stock trading down because the value factor is weak... Also, many sellside firms have updated their numbers now, so $CF is not really a "hidden gem" anymore...

But here's a treat - why not $UAN? Yes much smaller and illiquid, but not subject to passive flows as it's an MLP that no one really knows about outside of the fertilizer world

Subject to exactly the same dynamics as $CF, but guess what - the units trade at $62, and NTM distributions will be ~$20 - 30 per unit if fertilizer prices stay around where they are.

2Q will be the first quarter when they report the step-function increase in profitability and can afford to pay out distributions again. They were shut off for a few years. People are estimating $5-7/unit distributions for 2Q, and I think the math checks out if you do the work

Better yet, $UAN is not heavy in passive holders... good chunk of units held by the GP (owned by Icahn) and much of remaining float held by savvy funds and dedicated retail who know the story well

Once distributions are turned back on, this will start hitting the screens of unsophisticated generalists at larger funds and dumb retail who are starved for yield. Guess what... everyone will get greedy when yields are this high - they always do

There are lot of well thought out pitches in the public domain so this one will not be going into my blog. Doesn't need more cheerleading at this point. Numbers will speak for themselves

For anyone interested in quirky value ideas similar to this please sign up on my blog! No paywall, I like to dumpster dive in small cap / micro cap names that have the potential for significant near term value creation :)
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