Why Is Praxair Undervalued Compared to Its Peers?
Praxair’s forward PE multiple
The forward PE (price-to-earnings) multiple is a relative valuation method. It considers the company’s future earnings. As of October 21, 2016, Praxair (PX) traded at a one-year forward PE multiple of 20.20x compared to its peers such as Air Products and Chemicals (APD), Ecolab (ECL), and International Flavors and Fragrances (IFF). They’re trading at one-year forward PE multiples of 20.60x, 23.60x, and 21.70x, respectively.
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The forward PE ratio tells how much investors are paying per dollar of expected earnings in the next 12 months. Using the PE ratio, investors can compare two or more companies that operate in the same industry and decide which stock is overvalued or undervalued.
Market Realist’s analysis
Investors should note that Praxair is operating in an environment with low oil and natural gas prices. Since 2014, Praxair’s revenues fell. Praxair reported revenues of $12.30 billion in 2014 and $10.78 billion in 2015. Analysts expect Praxair’s revenues to be around $10.55 billion in 2016. Also, Praxair’s net profit margin has more or less remained constant around 15% since 2014.
From here on, things might look more positive. Praxair signed a few long-term contracts and expanded its capacity in several regions both at the international level and the local level. Praxair has a project backlog worth $1.3 billion that’s comprised of 17 projects. Praxair expects the projects to start to contribute to its revenue growth from 2H16 through 2018.
Investors can indirectly hold Praxair by investing in the iShares U.S. Basic Materials ETF (IYM). IYM invested 6.3% of its holdings in Praxair as of October 21, 2016.