Why Investors Shouldn't Be Surprised By CF Industries Holdings, Inc.'s (NYSE:CF) Low P/E

With a price-to-earnings (or "P/E") ratio of 7.3x CF Industries Holdings, Inc. (NYSE:CF) may be sending very bullish signals at the moment, given that almost half of all companies in the United States have P/E ratios greater than 17x and even P/E's higher than 33x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

While the market has experienced earnings growth lately, CF Industries Holdings' earnings have gone into reverse gear, which is not great. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for CF Industries Holdings

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How Is CF Industries Holdings' Growth Trending?

There's an inherent assumption that a company should far underperform the market for P/E ratios like CF Industries Holdings' to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 29%. Still, the latest three year period has seen an excellent 736% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to slump, contracting by 17% each year during the coming three years according to the analysts following the company. With the market predicted to deliver 13% growth each year, that's a disappointing outcome.

In light of this, it's understandable that CF Industries Holdings' P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that CF Industries Holdings maintains its low P/E on the weakness of its forecast for sliding earnings, 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 these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 1 warning sign for CF Industries Holdings that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.