APD’s forward price-to-earnings
In the previous part of this series, we looked at analysts’ recommendations for Air Products & Chemicals (APD). In this part, we’ll compare APD’s valuation with its closest peer. As of March 29, 2017, APD was trading at a one-year forward PE (price-to-earnings) multiple of 21.2x. Its peer Praxair (PX) was trading at 20.3x.
Forward PE is a relative valuation method that considers a company’s future earnings for calculation. The forward PE ratio tells how much investors are paying for a stock per dollar of expected earnings in the next 12 months. It’s one of the most popular valuation tools that can help you compare two or more companies that operate in the same industry and see which stock is overvalued or undervalued.
APD is trading at a premium to its peer
Currently, Air Products & Chemicals is trading at a premium to its peer Praxair. In the past three years, APD and PX have both seen their revenues fall. APD’s revenue fell from $10.4 billion in fiscal 2014 to $9.5 billion in fiscal 2016. Its financial reporting period is from October 1 to September 30.
Praxair’s revenue has fallen more quickly, from $12.3 billion in 2014 to $10.5 billion in 2016. However, with the spin-off of Versum Materials (VSM), APD’s revenue is expected to be $7.8 billion in 2017. Some of its new business wins in the past four to five months are expected to push its revenue, along with expected executions from its backlog orders.
Analysts are expecting a higher net profit margin for APD, indicating a better operating efficiency than its peer. Analysts also expect APD’s EPS (earnings per share) to be $6.15. Investors are typically willing to pay a higher price for a company with a growth story in terms of margins and revenues.
You can indirectly hold APD by investing in the ProShares Ultra Basic Materials (UYM), which has 3.7% of its total portfolio in APD. The top holding of the fund is Dow Chemical (DOW), with a weight of 8.8% as of March 29, 2017.