In the previous part, we looked at analyst recommendations. In this part, we’ll analyze FMC’s valuation compared to peers. Forward price-to-earnings (or PE) is a relative valuation method that considers the company’s future earnings. As of December 28, 2016, FMC (FMC) is trading at a one-year forward PE multiple of 17.2x as compared to its peer Albemarle (ALB), which is trading at a one-year forward PE multiple of 21.50x.
The forward price-to-earnings ratio tells how much investors are paying per dollar of expected earnings in the next 12 months. The PE ratio allows investors to compare companies that operate in the same industry and decide which stocks are overvalued or undervalued.
FMC is trading at a discount when compared to Albemarle (ALB). FMC’s 3Q16 results were good because of an outstanding performance from its lithium segment. However, the lithium segment constitutes only ~9% of FMC’s total revenue, whereas Albemarle derives ~36% of its total revenue through its lithium segment. As mentioned in an earlier part of the series, in the past one year, the demand for lithium-ion batteries has gone up substantially due to lithium’s use in mobile batteries, electric cars, and so on. In the long run, FMC seems to be more optimistic about its lithium segment growth and has planned to triple its production capacity to 30,000 metric tons by 2019 to meet the growing demand.
Also, Albemarle’s net operating profit margin is around 12%, while FMC’s net operating profit margin has been around ~8%.
Notably, investors can hold FMC by investing in the Guggenheim S&P 500 Equal Weight Materials ETF (RTM), which invests 4.0% of its portfolio in FMC. The top holdings of the fund include CF Industries (CF) and Dow Chemical (DOW), which have weights of 4.3% and 4.1% as of December 28, 2016.