Why DuPont Is Trading at a Premium Compared to Its Peers

In the previous part of this series, we looked at analyst recommendations for DuPont. In this section, we’ll analyze DuPont’s (DD) valuation with that of its peers. As of February 22, 2017, DD traded at a one-year forward PE multiple of 21.4x as compared to its peers Dow Chemicals (DOW) and LyondellBasell (LYB), which are trading at a one-year forward PE multiple of 14.7x and 9.5x, respectively.

Forward price-to-earnings (or PE) is a relative valuation method that considers the company’s future earnings for calculation. The forward price-to-earnings ratio tells how much investors are paying for the stock on per dollar of expected earnings in the next 12 months. It’s one of the most popular valuation tools that help investors to compare between two or more companies that operate in the same industry and see which stock is overvalued or undervalued.

At present, DuPont is trading at a premium to its peers Dow Chemical and LyondellBasell. In the past few years, all three companies have been struggling for revenue growth. However, DOW Chemical’s revenues are expected to rise in 2017 on the complete takeover of Dow Corning’s stake from Corning (GLW). LyondellBasell’s revenue is also projected to grow in 2017 primarily due to lower scheduled maintenance. DuPont may continue to struggle to see revenue growth in 2017.

DuPont had better net income margins when compared to its peers. DuPont recorded a net income margin of 10.2% in 2016, while DOW and LYB reported net income margins at 8.3% and 13.1% in 2016, respectively. However, the expected $1 billion in synergies from the merger with Dow Chemical and the continued headcount reduction could strengthen DuPont’s margin in 2017. The latest update on the merger is that EU antitrust regulators are set to approve the merger.

Investors can get exposure to DuPont by investing in the iShares U.S. Basic Materials ETF (IYM). IYM has invested 11.0% of its portfolio in DuPont as of February 22, 2017.