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Air Products and Chemicals, Inc. (NYSE:APD) closed yesterday at $217.28, which left some investors asking whether the high earnings potential can still be justified at this price. Let’s look into this by assessing APD’s expected growth over the next few years.
Has the APD train has slowed down?
According to the analysts covering the company, the following few years should bring about good growth prospects for Air Products and Chemicals. Expectations from 19 analysts are certainly positive with earnings per share estimated to rise from today’s level of $7.521 to $11.205 over the next three years. On average, this leads to a growth rate of 13% each year, which indicates a solid future in the near term.
Is APD’s share price justifiable by its earnings growth?
APD is trading at price-to-earnings (PE) ratio of 28.89x, which suggests that Air Products and Chemicals is overvalued based on current earnings compared to the Chemicals industry average of 17.4x , and overvalued compared to the US market average ratio of 17.45x .
We already know that APD appears to be overvalued when compared to its industry average. But, to properly examine the value of a high-growth stock such as Air Products and Chemicals, we must reflect its earnings growth into the valuation. I find that the PEG ratio is simple yet effective for this exercise. A PE ratio of 28.89x and expected year-on-year earnings growth of 13% give Air Products and Chemicals a quite high PEG ratio of 2.23x. This means that, when we account for Air Products and Chemicals’s growth, the stock can be viewed as overvalued , based on the fundamentals.
What this means for you:
APD’s current overvaluation could signal a potential selling opportunity to reduce your exposure to the stock, or it you’re a potential investor, now may not be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
- Financial Health: Are APD’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Past Track Record: Has APD been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of APD’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.