Famed activist investor Dan Loeb of the Third Point hedge fund is known for his successful activist campaign over at Yahoo!, but he’s now trading in his tech stock holding for a crack at the agricultural industry.
Per his recent investor letter, Loeb is amassing a stake in North America’s largest nitrogen fertilizer manufacturer, CF Industries Holdings, Inc. (NYSE:CF) . The stock popped nearly 12% on the news.
What does Loeb’s want? A higher dividend. The current dividend yield on the stock is only 0.8%.
In his 2Q letter Loeb notes that…
CF management has the ability to highlight the value of this stable cash flow stream by paying a significant portion of it as a dividend. A high dividend payout would still leave CF’s leverage well below the 3x debt to EBITDA criteria that Moody’s recently established as adequate to maintain their current debt rating of Baa2.
Another highlight that Loeb points out includes the fact that CF Industries Holdings, Inc. (NYSE:CF) is trading on the cheap. Specifically, it trades at an unwarranted discount to other fertilizer companies.
CF Industries Holdings, Inc. (NYSE:CF) really deserves to trade inline, or at a premium, with peers, in large part due to the company’s access to low-cost North America natural gas, which is the top input in nitrogen fertilizer production. Natural gas accounts for around 40% of cost of sales for nitrogen fertilizer production.
This affords CF Industries Holdings, Inc. (NYSE:CF) an impressive advantage over peers on a margin basis. Along those lines, there is an abundance of natural gas, which is helping keep prices low.
CF Industries Holdings, Inc. (NYSE:CF) also snatched up Terra Industries in 2010. Terra made CF the leader in the nitrogen-fertilizer market. Around 83% of company sales in 2012 was from the nitrogen business and the remaining 17% from the phosphate-fertilizer business. CF’s Donaldsonville, LA nitrogen-fertilizer facility is the largest in North America, with its Medicine Hat, Alberta-plant the second largest.
Fellow activist hedge fund, Jana Partners, has been looking to shake up the agricultural industry as well. Jana owned over 11 million Agrium Inc. (USA) (NYSE:AGU) shares at the end of 1Q, which made up nearly 23% of the fund’s public equity portfolio.
Agrium Inc. (USA) (NYSE:AGU) is the third-largest potash producer in North America. The company produces all three major agricultural macro-nutrients — nitrogen, potash, and phosphate besides. Agrium expects strong crop inputs to provide a boost to revenue in 2013.
Jana’s big thesis for investing in Agrium Inc. (USA) (NYSE:AGU) was that he hoped to break up the company. Jana noted that the company was failing to properly manage its retail segment. Jana lost a proxy challenge back in April, but founder Barry Rosenstein has noted that the battle is not over. The stock is down nearly 15% over the last 12 months.
Jana believes there is upwards of $50 per share in value that could be unlocked if the company spins off its retail segment.
One potential headwind for Agrium Inc. (USA) (NYSE:AGU) is that the potash market appears to be in upheaval. Fellow potash producer, Mosaic Co (NYSE:MOS), fell nearly 20% as news broke that a major potash consortium is disbanding. What this means is that prices are likely to fall as the low-cost industry producers turn their focus to increasing volume and taking market share by lowing prices.