Stock Analysis

Fertilizantes Heringer S.A. (BVMF:FHER3) Held Back By Insufficient Growth Even After Shares Climb 30%

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Those holding Fertilizantes Heringer S.A. (BVMF:FHER3) shares would be relieved that the share price has rebounded 30% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. This latest share price bounce rounds out a remarkable 603% gain over the last twelve months.

Even after such a large jump in price, Fertilizantes Heringer's price-to-earnings (or "P/E") ratio of 5.8x might still make it look like a strong buy right now compared to the market in Brazil, where around half of the companies have P/E ratios above 13x and even P/E's above 29x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

For example, consider that Fertilizantes Heringer's financial performance has been poor lately as it's earnings have been in decline. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for Fertilizantes Heringer

BOVESPA:FHER3 Price Based on Past Earnings August 26th 2021
Although there are no analyst estimates available for Fertilizantes Heringer, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The Low P/E?

Fertilizantes Heringer's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 64%. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

This is in contrast to the rest of the market, which is expected to grow by 14% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Fertilizantes Heringer is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Bottom Line On Fertilizantes Heringer's P/E

Even after such a strong price move, Fertilizantes Heringer's P/E still trails the rest of the market significantly. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Fertilizantes Heringer maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Before you take the next step, you should know about the 5 warning signs for Fertilizantes Heringer (3 are significant!) that we have uncovered.

You might be able to find a better investment than Fertilizantes Heringer. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

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