Selecting a multiple
CF Industries’ (CF) earnings have been falling for the past five years, and it reported negative earnings in 4Q16.
Instead of using the PE (price-to-earnings) multiple to value the company, we’ll use the EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple, which is less volatile than PE.
Multiple rises and falls
From March 2011 to September 2013, CF Industries’ EV-to-EBITDA traded between 2.5x and 4.5x. Following the company’s announcement of its capacity expansion, its EV-to-EBITDA multiple rose steeply in 2H13, reaching a peak of 7x in March 2014. Between then and April 2016, the company’s valuation multiple traded between 6x and 8x.
More recently, CF’s multiple soared to a high of 16.3x, primarily on the back of a rally in its stock price. Valuation multiples are leading indicators in the sense that they rise when a company is expected to do well in the next 12 months, and vice versa.
On March 21, 2017, CF’s EV-to-EBITDA multiple fell to 10.9x, close to its peers’ (MOO) median of 10.7x. PotashCorp (POT) was trading at 13.x, The Mosaic Company (MOS) was trading at 10.5x, and Agrium (AGU) was trading at 9.5x.
In the last part of this series, we’ll discuss analysts’ next-12-month recommendations and price targets for CF Industries.