Forward PE multiple
In this part, we’ll look at LyondellBasell’s one-year forward price-to-earnings (PE) ratio and compare it with its peers. As of January 25, 2018, LYB’s one-year forward price-to-earnings multiple stood at 12.60x, while its peer Eastman Chemical (EMN) had a one-year forward price-to-earnings multiple of 12.20x.
The forward PE multiple considers future projected earnings to calculate valuations. The forward PE multiple is one of the many tools that investors can use to compare two or more companies that operate in the same industry. This multiple can help investors to determine which company is overvalued and which company is undervalued.
Where does LyondellBasell stand?
At present, LyondellBasell is trading at a marginal premium to its peers. LyondellBasell’s new business wins, its strategic investment to acquire a 50% stake in Quality Circular Polymers, and the continued share repurchases will likely drive LYB’s fiscal 2018 earnings. To meet the continued demand, LYB has expanded its ethylene plants in La Porte, Channelview, and Corpus Christi sites. Further, LYB is building the world’s largest propylene oxide (PO) and tertiary butyl alcohol (TBA) plant in the Houston area. The plant is expected to be completed in 2019.
On the other hand, LyondellBasell has been plagued with turnaround issues, which could impact its earnings adversely. As a result, LYB’s fiscal 2018 adjusted earnings per share are projected at $9.63, a decline of 4.2% over the expected fiscal 2017 earnings.
Eastman Chemical’s fiscal 2018 earnings are expected to grow by 16.6% on a year-over-year basis, which indicates that EMN could see better earnings growth than its peer and LyondellBasell could be overvalued.
Investors can indirectly hold LyondellBasell by investing in the First Trust Materials AlphaDEX Fund (FXZ), which has invested 3.5% of its portfolio in LyondellBasell. The fund also provides exposure to Cabot (CBT) and Huntsman (HUN), which have weights of 3.5% and 3.4%, respectively, as of January 25, 2018.