CF Industries Holdings, Inc. (NYSE:CF) closed yesterday at $41.03, which left some investors asking whether the high earnings potential can still be justified at this price. Below I will be talking through a basic metric which will help answer this question.
Has the CF train has slowed down?
CF Industries Holdings’s extremely high growth potential in the near future is attracting investors. Expectations from 18 analysts are extremely bullish with earnings per share estimated to rise from today’s level of $3.018 to $3.239 over the next three years. On average, this leads to a growth rate of 17% each year, which signals a market-beating outlook in the upcoming years.
Is CF’s share price justifiable by its earnings growth?
CF Industries Holdings is available at a price-to-earnings ratio of 13.6x, showing us it is undervalued relative to the current US market average of 15.83x , and undervalued based on its latest annual earnings update compared to the Chemicals average of 17.27x .
Given that CF’s price-to-earnings of 13.6x lies below the industry average, this already indicates that the company could be potentially undervalued. But, to properly examine the value of a high-growth stock such as CF Industries Holdings, we must reflect its earnings growth into the valuation. I find that the PEG ratio is simple yet effective for this exercise. A PE ratio of 13.6x and expected year-on-year earnings growth of 17% give CF Industries Holdings a very low PEG ratio of 0.80x. This means that, when we account for CF Industries Holdings’s growth, the stock can be viewed as relatively cheap , based on fundamental analysis.
What this means for you:
CF’s current undervaluation could signal a potential buying opportunity to increase your exposure to the stock, or it you’re a potential investor, now may be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:
- Financial Health: Are CF’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Past Track Record: Has CF been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of CF’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.