CF Industries Holdings Inc (NYSE:CF): A Peter Lynch-Style Investment Analysis

The investment philosophy created by well-known fund manager Peter Lynch focuses on finding companies with lasting growth paths trading at sensible prices. His method mixes parts of growth and value investing, concentrating on businesses with good fundamentals that can be kept for long stretches. The strategy uses particular financial filters to find companies with earnings growth from 15% to 30%, sensible valuation measures, and good financial health signs.

Financial Health and Stability

CF Industries Holdings Inc (NYSE:CF) shows very good financial strength in several measures that match Lynch's focus on company steadiness. The nitrogen fertilizer producer keeps strong liquidity with a current ratio of 3.22, much higher than Lynch's lowest need of 1.0. This points to good short-term financial health and the capacity to handle immediate responsibilities without difficulty. The company's debt-to-equity ratio is 0.60, meeting the filter's limit while allowing for betterment toward Lynch's chosen level under 0.25. However, the fundamental review states that even with this ratio, the company keeps good free cash flow to handle its debt duties.

• Current Ratio: 3.22 (above minimum 1.0 need)
• Debt-to-Equity: 0.60 (meets filter limit <0.6)
• Quick Ratio: 2.84 (very good short-term liquidity)

Profitability and Returns

The company's profitability measures are especially notable, with a return on equity of 26.23% greatly exceeding Lynch's 15% lowest limit. This very good ROE shows effective use of shareholder money and places it with the best in the chemicals industry. The fundamental review report gives CF Industries a profitability grade of 9 out of 10, mentioning great results across several margin groups including operating margin of 29.21% and profit margin of 20.20%, both placed in the highest group of industry competitors.

• Return on Equity: 26.23% (much higher than 15% minimum)
• Operating Margin: 29.21% (top level in industry)
• Return on Invested Capital: 12.07% (very good capital use)

Growth and Valuation Match

CF Industries shows the kind of lasting growth Lynch liked, with five-year EPS growth of 24.81% sitting inside his chosen 15-30% span. This growth speed, paired with a low P/E ratio of 12.35, makes a good valuation picture. The PEG ratio of 0.50, figured using past earnings growth, sits far under Lynch's limit of 1.0, suggesting the stock could be priced low compared to its growth path. While future growth estimates show slowing, the present valuation seems to account for this change.

• 5-Year EPS Growth: 24.81% (inside Lynch's 15-30% preferred span)
• P/E Ratio: 12.35 (under industry and S&P 500 averages)
• PEG Ratio: 0.50 (points to possible low pricing)

Fundamental Review Summary

The full fundamental analysis gives CF Industries a total score of 7 out of 10, pointing out great health and profitability measures that are with the best in the chemicals industry. The report mentions the company's "good base" with "acceptable growth" and "rather low" valuation, proposing an appealing mix for investors looking for quality at sensible prices. The analysis specifically notes the company's good free cash flow creation, which backs both its dividend plan and debt handling abilities.

Dividend and Capital Return

While not a main point in Lynch's strategy, CF Industries provides a 2.23% dividend yield with a ten-year record of steady payments and yearly dividend growth averaging almost 11%. The payout ratio of 26.34% seems lasting, though the fundamental review states that earnings growth has recently been slower than dividend growth, needing attention. The company has also lowered shares available through buybacks, another trait Lynch appreciated.

For investors wanting to look at other companies that fit Peter Lynch's investment rules, more filter results can be found using our Peter Lynch Strategy Screener.

Disclaimer: This analysis is based on fundamental data and investment method ideas for learning only. It does not form investment guidance, and investors should do their own study and talk with financial consultants before making investment choices. Past results do not ensure future outcomes.