Air Products and Chemicals’ forward PE
Forward price-to-earnings (or PE) is a relative valuation method that considers a company’s future earnings for calculation. In the past two years, Air Products and Chemicals (APD) has been trading at a one-year forward PE multiple in the range of 15.50x–23.10x.
As of July 22, 2016, Air Products and Chemicals was trading at a one-year forward PE multiple of 18.8x compared to its peers Praxair (PX) and FMC (FMC), which were trading at one-year forward PE multiples of 20.10x and 16.60x, respectively.
The forward price-to-earnings ratio tells us how much investors will be paying for a stock per dollar of expected earnings in the next 12 months. Using the PE ratio, investors can compare between two or more companies that operate in the same industry and decide which stock is overvalued or undervalued. However, PE ratio is one of the valuation metrics, and the decision should not be made to buy or sell a stock based only on this metrics due to its other limitations.
However, PE ratio is just one of many valuation metrics, and the decision should not be made to buy or sell a stock based only on this metric due to its potential limitations.
The EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple is an important relative valuation multiple that is widely used in capital-intensive industries such as the chemical industry. This multiple also considers debt for calculation and is thus a better metric than the PE ratio.
As of July 22, APD’s one year forward EV-to-EBITDA ratio stood at 10.8x. Its peers Praxair and FMC’s forward EV-to-EBITDAs were 11.9x and 10.9x, respectively. This multiple is calculated based on a company’s estimated EBITDA for the next 12 months.
Notably, investors can hold Air Products and Chemicals indirectly by investing in the SPDR S&P 500 ETF (SPY) and the iShares Russell 1000 ETF (IWB), which each had weights of 0.15% in Air Products and Chemicals as of July 22, 2016.