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Why Is Praxair Trading at a Discount Compared to Peers?

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Praxair’s forward PE

The forward PE (price-to-earnings) multiple is a relative valuation method that considers a company’s future earnings in its calculation. On December 9, 2016, Praxair (PX) was trading at a one-year forward PE multiple of 21.0x, as compared to Air Products and Chemicals’ (APD) one-year forward PE multiple of 22.9x.

The forward PE ratio tells us how much investors are paying per dollar of expected earnings for the next 12 months. Using the PE ratio, investors can compare between two or more companies operating in the same industry and decide which stock is overvalued or undervalued.

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EV-to-EBITDA

The EV-to-EBITDA (enterprise value to earnings before interest, taxes, depreciation, and amortization) multiple is another important relative valuation multiple that is widely used in capital-intensive industries like the chemical industry. On December 9, 2016, Praxair’s one year forward EV-to-EBITDA stood at 12.2x, while APD’s one-year forward EV-to-EBITDA was 13.10x

Why is Praxair trading at a discount?

Praxair is now trading at a discount to Air Products and Chemicals. Praxair’s revenue fell from ~$12.3 billion in 2014 to ~$10.8 billion in 2015, and analysts are expecting a further decline in revenues in 2016 to ~$10.5 billion. APD’s revenue also fell during that period, but at a much slower rate. In fiscal 2014, APD’s revenue was ~$10.4 billion, and it saw further declines to ~$9.9 billion in fiscal 2015 and ~$9.5 billion in fiscal 2016. (APD follows a financial reporting period from October 1 to September 30.)

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Praxair’s EBITDA margin has been hovering around 31%–33.5% since 2014. Praxair’s margins have been impacted by the increasing cost of goods sold. As a percentage of sales, Praxair’s cost of goods sold in 2014 was 43.3%. In 2015, this increased to 55.3%, and in 2016, it’s expected to increase to 57.6%.

By comparison, APD’s EBITDA margin rose from 25% in fiscal 2014 to 34.4% in fiscal 2016. In October, APD spun off its Electronic Materials division to a new company, Versum (VSM), which could add value to the shareholders.

ETF investment

Notably, investors can indirectly hold Praxair by investing in the iShares US Basic Materials ETF (IYM), which had 6.9% of its total portfolio in Praxair on December 9, 2016. The top holding of IYM is DuPont (DD), with a weight of 11.6% as of the same date.

Continue to the next and final part for a closer look at the proposed merger between Praxair and Linde AG.

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