Forward PE ratio
The forward PE (price-to-earnings) ratio is a relative valuation method that considers the company’s future earnings. As of March 21, 2017, Dow Chemical (DOW) traded at a one-year forward PE ratio of 15.50x—compared to its peers Eastman Chemical (EMN) and LyondellBasell (LYB). They traded at a one-year forward PE ratio of 10.40x 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. It checks which stock is overvalued or undervalued.
Dow Chemical trades at premium
Currently, Dow Chemical is trading at a premium compared to its peers Eastman and LyondellBasell. Dow Chemical posted better-than-expected 4Q16 earnings due to the continued integration of Corning’s (GLW) business. After its revenue fell for two years, analysts expect its revenue to increase to $52 billion in 2017. Eastman’s revenue has been struggling to grow. LyondellBasell is also struggling with its revenue growth. However, LyondellBasell stated that most of its maintenance issues are over. The company expects 2017 to be better. Synergies from the Corning integration are expected to be more visible in 2017, which could lead to better earnings. Analysts expect Dow Chemical to post EPS of $4.09 in 2017.
Notably, investors can hold Dow Chemical indirectly by investing in the Vanguard Materials ETF (VAW). VAW invested 8.60% of its portfolio in Dow Chemical as of March 21, 2017.