Forward PE ratio
The forward PE (price-to-earnings) ratio is a relative valuation method that considers the company’s future earnings. As of May 3, 2017, International Flavors and Fragrances (IFF) traded at a one-year forward PE ratio of 23.15x compared to its peer Sensient Technologies (SXT), which traded at a one-year forward PE ratio of 22.80x.
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 valuation tools that helps investors compare two or more companies that operate in the same industry. It checks which stock is overvalued or undervalued.
IFF trades at a marginal premium to its peer
At present, International Flavors and Fragrances is trading at a marginal premium to its peer Sensient Technologies. After IFF posted better-than-expected 4Q16 earnings, analysts expect the upward trend to continue. Analysts expect IFF revenue to be at $3.3 billion for fiscal 2017 and approximately $3.5 billion in fiscal 2018, indicating a growth of approximately 5% year-over-year. On the other hand, Sensient Technologies’ revenue growth has remained range-bound. Further, IFF’s focus on adding between $500 million to $1 billion in revenues through acquisitions by 2020 is on track. In the span of one year, it completed the acquisitions of David Michael and Fragrance Resource. IFF also acquired PowderPure in April.
With revenue growing, analysts expect the earnings per share to grow by 5% annually for the next two years. Further, the productivity measures are expected to save around $40 million to $45 million by 2019, which should boost EPS. All these positive factors could have encouraged investors to pay a premium for IFF compared to peers.
Investors can indirectly hold International Flavors and Fragrances by investing in the iShares U.S. Basic Materials ETF (IYM), which has invested 1.8% of its holdings in IFF as of May 2, 2017. The top holdings of this fund include Dow Chemical (DOW) and DuPont (DD), which have weights of 11.6% and 11.5%, respectively, as of May 2, 2017.