As the United States economy continues to show signs of a potential contraction, especially after following the nine-month consecutive contracting readings in the ISM manufacturing PMI index, some industries are beginning to show signs of favoritism. As the cycle gets underway, markets usually switch their preferences between the industries deemed 'cyclical' in and / or out of those opposed as 'defensives.'

Shares of C.F. Industries (NYSE: C.F.) are rising by as much as 1.7% in the post-market hours of Wednesday evening, a reaction that comes after the long-awaited second quarter 2023 earnings results from the company. As the stock experienced some volatile periods during 2021 and 2022, this year has been a make-or-break period for those investors considering a potential purchase in the company's stock.

Competitors like Mosaic (NYSE: MOS) are falling behind, as analyst ratings see a decent double-digit upside in C.F. along with market dynamics proposing the possibility of this stock becoming the favorite in this preferred industry. Management has proven to entertain the case of some undervaluation presence in today's prices, opening up the opportunity for investors to tag along in a new rally.

Good Quarter?

Management has led the earnings release by letting investors know where they have placed $130 million of precious free cash flow. During the past quarter, 2 million shares have been retired off the open market, which can be taken as a vote of confidence from management. In a two-fold dynamic, this repurchase speaks to the viewpoint of undervaluation alongside the expectation of a brighter future in the company.

Considering the massive insight that the insiders themselves have over the market, investors should not take this action lightly. Despite a 47.6% decline in annual net sales, the underlying drivers of the industry are beginning to recover, a trend that has opened the path for margins and profitability to expand in C.F.

Cost of sales lowered in 2023 compared to 2022 due to the normalization of natural gas prices in the open market. However, these benefits resulted from a normalizing supply chain in the global landscape, which severely affected C.F.'s pricing power. Average selling prices in 2023 were lower than in 2022, though volumes are starting to tick up as the industry comes into a cyclical bullish trend.

When it comes to the cyclicality of the industry, investors are in for a swift recovery in the little contractions that were reported by C.F. As the CEO, Tony Will, mentioned within the release: "We believe North American nitrogen channel inventories were drawn down significantly during the spring application season, setting up a positive demand dynamic in the second half of 2023."

Understanding that demand is coming in the crops and agricultural markets for the United States, alongside the market's sentiment toward the company's future sales, investors can begin to get on the same page as management and justify significant purchases in the stock.

Advantageous Playing Field 

When comparing the market's perspective toward C.F. relative to Mosaic, current valuation multiples may provide another hint as to where the company is expected to go. Beginning with C.F. analyst ratings, an 11.8% consensus price ceiling from today's price is the foundation for what may come shortly.

Considering that Wells Fargo (NYSE: WFC) analysts recently upgraded the stock's target to $98 per share from its previous $95, there has to be a reasonable motivator behind this newfound confidence. Management's demand outlooks and aggressive buyback program are backed by what the stock's valuation multiples reflect today.

Breaking down the price-to-sales ratio, a valuation multiple often looked at as the gauge of where the best quality (or perceived growth) of sales is within a given industry, can help investors understand why they should be considering C.F. over other competitors. Mosaic stock trades at a 0.7x P/S ratio, while C.F. stock can be picked up for 1.5x today.

Some may argue that this only makes C.F. the more expensive alternative in the sector; however, there is a reason behind the premium price of the stock. As markets - and management - are aware, sales for the company are expected to rise as the underlying industry enters a new demand cycle. The key is behind the product itself.

Mosaic focuses on the potash and phosphate markets, which are seeing a steady supply and demand balance in today's environment. C.F., on the other hand, focuses on hydrogen and nitrogen, which are directly tied to natural gas, and in case people have not noticed, these markets have been giving birth to mouth-watering volatility.