DuPont’s forward price-to-earnings
In the previous part, we saw analysts’ recommendations. In this section, we’ll analyze DuPont’s (DD) valuation compared to its peers. Forward PE (price-to-earnings) is a relative valuation method. It considers the company’s future earnings. As of January 11, 2017, DuPont traded at a one-year forward PE multiple of 20.00x compared to its peers Dow Chemical (DOW) and LyondellBasell (LYB). They’re trading at a one-year forward PE multiple of 14.40x and 9.0x, respectively.
The forward PE ratio tells how much investors are paying for the stock per dollar of expected earnings in the next 12 months. It’s one of the most popular valuations tools that helps investors compare two or more companies that operate in the same industry. Investors can see if the stock is overvalued or undervalued.
DuPont trades at a higher valuation to its peers
Currently, DuPont is trading at a premium to its peers Dow Chemical and LyondellBasell. In the past two years, all three companies struggled with their revenue growth. Dow Chemical, with its acquisition and its joint ventures, expects the revenue to grow in the near future. LyondellBasell’s revenue for fiscal 2016 took a hit with unusually high maintenance. It’s expected to post better revenues in fiscal 2017 due to better operating capacities. DuPont, with better 3Q16 earnings, expects revenue growth to continue in the near future.
In terms of the net income margin, DuPont has a better net income margin than its peers—due to its cost-saving measures. DuPont is expected to post a net income margin of 11.4% for fiscal 2016, while Dow Chemical is expected to post a net income margin of 9.5%. With a $1 billion synergy expected out of Dow Chemical and DuPont’s merger, the margins are expected to get stronger.
Notably, investors can indirectly hold DuPont by investing in the iShares U.S. Basic Materials ETF (IYM). IYM invested 13% of its portfolio in DuPont as of January 11, 2017. The fund’s other top holdings include Monsanto (MON) and Praxair (PX) with weights of 9.5% and 6.7%, respectively.