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Is CF Industries’ Valuation Justified?

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Dec. 4 2020, Updated 10:53 a.m. ET

Valuation multiples

CF Industries (CF) has performed dismally in 2016. With the stock returning -41% YTD (year-to-date), it has left some investors in an uncomfortable position. In this part, we’ll discuss CF’s valuation multiple and compare it with that of peers (IYM).

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Multiples trading higher

Recently, the forward PE (price-to-earnings) multiples of the four major agricultural fertilizer players have been trading higher. CF is trading at a forward PE of 21.9x, which is almost double its two-year median of 11.3x.

In comparison, PotashCorp (POT) and Mosaic (MOS) are trading at forward PE multiples of 29.2x and 30x, respectively. Agrium (AGU) is trading at a forward PE multiple of 17x. These companies are trading well above the two-year average of ~11.5x.

What the multiples mean

When a company trades at a higher multiple than it has historically or its peers, it indicates that the company is overvalued. For example, for CF Industries, investors paid an average of 11.3x over the past two years and are currently paying 22 times the forward earnings. While there is optimism that the market will improve in the next year, some question whether CF’s 7% growth next year is deserved.

Over time, as high-cost producers shut down, nitrogen demand grows, and input costs fall, CF’s situation may improve. However, low nitrogen prices continue to weaken CF. In the next part of this series, we’ll look at CF Industries’ analyst ratings and price targets.

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