Praxair’s forward price-to-earnings multiple
In the previous part, we looked at analysts’ recommendations and views. In this part, we’ll look into Praxair’s (PX) valuation and compare it with its peer. As of November 27, 2017, Praxair’s one-year forward PE (price-to-earnings) multiple stood at 24.2x, while its peer Air Products & Chemicals (APD) had a one-year forward PE multiple of 22.7x.
The forward PE multiple is one of the valuation methods that factor future earnings. The forward PE ratio helps investors compare two or more companies operating in the same industry and decide which company is overvalued and which one is undervalued.
Praxair trades at a higher multiple
Currently, Praxair is trading at a higher multiple than APD. Praxair posted better-than-expected adjusted EPS (earnings per share) and upgraded its fiscal 2017 adjusted EPS. As a result, analysts expect PX’s fiscal 2017 adjusted EPS to be $5.81, which is 6% higher than its fiscal 2016 adjusted EPS. As Praxair continues to work toward the merger with Linde AG and gain new business, analysts are projecting its fiscal 2018 adjusted EPS to be $6.34, implying a growth of 9.2% over the expected fiscal 2017 adjusted EPS.
Analysts are expecting APD’s adjusted EPS for fiscal 2018 to be $7.01, representing a growth of 11.1% over fiscal 2017. Although APD’s adjusted EPS is higher, it’s trading lower than PX, indicating that it may be undervalued.
Investors can hold Praxair indirectly by investing in the iShares Global Materials (MXI), which has 2.1% of its total holdings in PX as of November 27, 2017. The top holdings of MXI include DowDuPont (DWDP) and Monsanto (MON) with weights of 8.1% and 2.6%, respectively.