In this series, we’ve already looked at the PE (price-to-earnings) valuation multiples for Potash Corporation (POT) and its peers Mosaic (MOS) and CF Industries (CF). Now let’s use another valuation multiple, EV-EBITDA (enterprise value to earnings before interest, taxes, depreciation, and amortization), to compare these companies.
How multiples changed
Following Potash Corporation’s announcement, its EV-EBITDA multiple went from 6.9x to 8.03x. This may indicate that Potash Corporation’s investors considered the proposal overpriced and a negative for the company. Historically, the company has traded anywhere between 6.5x and 12.5x.
On the opposite end, the EV-EBITDA multiple for K+S Potash fell from 6.2x to 4.9x. The company has traded anywhere between 4.9x and 9.2x in the past. The withdrawal of Potash Corporation’s proposal takes away the anticipated value addition to the company’s shareholders, which explains the drop in valuation multiple.
Valuation multiples of all companies in the fertilizer space have recently trended downward due to weakness in the future outlook for the sector. The average EV-EBITDA of Potash Corporation’s peers is 5.7x, with Mosaic (MOS) trading at 5.4x and CF Industries (CF) trading at 4.4x. The VanEck Vectors Agribusiness ETF (MOO) holds 8.4% of Potash Corporation and Agrium (AGU) as a percentage of its total portfolio.
Why use EV-EBITDA?
EV-EBITDA takes into account the effect of debt and cash of a company under evaluation. This makes a comparison capital structure neutral, since the fertilizer business is capital-intensive and a high debt level isn’t uncommon. This multiple also eliminates the various methods used to account for depreciation by various companies.