Morgan Stanley analysts Jessica Alsford and Richard Felton introduce us to over 300 companies in their new thematic product offering investors an opportunity to profit from seven sustainability themes that also have the potential to generate attractive returns in the ensuing 12 months.

In their August 7, 2014 report titled “S + R Thematic Investing” the analysts look at companies falling under the following seven (Sustainable + Responsible) themes:

  • climate change
  • food availability
  • water scarcity
  • waste management
  • health and wellness
  • improving lives, and
  • ageing population

In this series, read our earlier article on Calpine Corporation (NYSE:CPN), a company that is at the forefront of meeting the challenge from climatic change, here.

Top 30 sustainability themed stocks globally

“This report specifically aims to identify how these themes may enable companies to drive growth and returns,” say the analysts.

They highlight 30 top stock picks based on the sustainability theme and equally split between the US, Europe and Rest of the World. Stocks have been filtered for an overweight rating, a minimum market cap of $ 2 billion and potential upside of at least 10% from current levels.

The US companies in the shortlist are shown in the table below:

Food availability, demand and prices

According to OECD projections, population growth and rising incomes will cause a huge increase in demand for food. It is estimated that agricultural output will have to grow 70% by 2050 if this additional demand is to be satisfied. According to the FAO, annual cereal production will have to rise to 3 billion tons from the current levels of 2.1 billion tons, while annual meet production must increase by 200 million tonnes to a level of 470 million tons in 2050.

But a number of factors are inhibiting growth of food production. These include climatic changes such as droughts and floods, global warming that can hamper crop output and increased occurrence of crop and livestock diseases.

Additionally, a sharp rise in agricultural input costs, particularly fertilizer, seeds and transportation, is pressurizing the profitability of agricultural businesses.

What’s more, the advent of biofuels has led to the diversion of agricultural resources from food to fuel, causing food prices to rise sharply.

population-food-price CF Industries

To increase crop yields farmers have had to take recourse to genetically modified crops. Though these crops come with the added advantage of being more disease resistant, the jury is still out on whether these crops have environmental, human health or social economic issues.

Another, traditionally used method to boost crop output is the use of fertilizers.

CF Industries Holdings, Inc. (CF)

CF Industries Holdings, Inc. (NYSE:CF) is a global leader in nitrogen fertilizer manufacturing and distribution. The company also owns and operates world-scale nitrogen complexes and its distribution system serves a variety of agricultural and industrial customers.

The company claims it is a “nitrogen bellwether in the global fertilizer industry and the premier nitrogen manufacturer in North America.”

Lower profits and revenue in Q2

CF Industries Holdings, Inc. (NYSE:CF) reported Q2 EPS of $ 6.10, missing analysts’ expectations by $0.61. It reported revenue of $1.47 billion which surpassed estimates by $ 130 million. While revenue fell 14% compared to the year ago period, earnings were down 37%.

The company’s nitrogen profitability was hampered due to lower average selling prices, rising natural gas costs and the impact of unscheduled downtime. The company also took a hit for unrealized mark to market losses on its outstanding hedge transactions.

However, the company generated record first-half ammonia sales volume due to robust demand, helped no doubt by its in-market storage capacity as well as a superlative logistical and distribution network.

CF Industries Holdings, Inc. (NYSE:CF) executed fully its existing $3 billion share buyback program and boosted its quarterly dividend by 50% from $ 1.00 to $ 1.50. It obtained a fresh share buyback authorisation worth $ 1.0 billion.

It also closed the sale of its phosphate business to Mosaic Co (NYSE:MOS) for after-tax cash proceeds of $ 1.1 billion.

CF Industries’ long-term view

Global population growth, higher protein diets and use of crops as a source of renewable fuels all are driving demand for more grain, the company said in its press release.

“The limited ability to bring into production additional arable land globally requires increased yields. The need for increased yields drives demand for nitrogen fertiliser, the nutrients that must be applied every year to promote plant growth. With a focus on nitrogen production, and the enduring structural advantage of low-cost North American natural gas, CF Industries Holdings, Inc. (NYSE:CF) is well-positioned to generate sustainably strong cash flow,” it said.

Price Performance

CF Industries weekly-chart

In the weekly chart above, note that the stock is currently consolidating inside a symmetrical triangle. A breakout to the upside, with good volumes, would reinstate the stock’s uptrend.

Analysts’ ratings

CF Industries Holdings, Inc. (NYSE:CF) is rated Overweight by Morgan Stanley with a price target of US$300.

Barclays have reaffirmed an Equal Weight rating, while analysts at Feltl & Co upgraded the stock to Buy. Scotiabank posted the rating from Sector Perform to an Outperform rating. Citigroup analysts maintain a Neutral rating and a price target of $256.00.