Balanced View on Air Products - Analyst Blog

On May 8, we issued an updated research report on industrial gas giant Air Products APD. While the company should benefit from its cost reduction measures, new business deals and strategic investments, it is exposed to high energy costs and challenges in its tonnage gases business.

Air Products' earnings for second-quarter fiscal 2014 (ended Mar 31, 2014), reported on Apr 23, missed the Zacks Consensus Estimate while sales beat. Sales rose as a decline in the Equipment and Energy division was more than offset by gains in other businesses. The company narrowed its earnings guidance for the full year.

Air Products, a Zacks Rank #3 (Hold) stock, benefits from a diverse customer base, sustained pricing power and cost-reduction measures. New business deals and strategic investments are expected to support results in fiscal 2014. Moreover, the acquisition of a 67% stake in Chilean industrial gas company, Indura S.A., has ushered in substantial growth opportunity for Air Products.

We are also encouraged by incremental opportunities in the liquefied natural gas LNG space. Air Products has been chosen for a major off-shore LNG project in Malaysia, representing a significant opportunity for its LNG technology and equipment. The LNG technology is gaining importance as it meets the increasing global need for cleaner energy.

Air Products is also keeping a tight control on expenses and undertaking work process improvement initiatives. Moreover, it remains committed to maximize returns to shareholders. The company's Board, in Mar 2014, raised its quarterly dividend by 8.5% to 77 cents per share.

However, Air Products' tonnage gases business continues to face challenges due to maintenance outages. Lower volumes and higher maintenance spending may impact profit in this division. The company sees higher level of maintenance activity and some outages in this business in the third quarter.

Moreover, helium volumes remain weak due to feedstock supply constraints and weak packaged gases demand in Europe.

High energy costs also pose a threat to margin expansion. In addition, shutdown of the polyurethane intermediates PUI business is expected to have an earnings headwind of 10 cents per share in fiscal 2014.

Other Stocks to Consider

Other chemical stocks worth considering include Compass Minerals International Inc. CMP, The Dow Chemical Company DOW and Kronos Worldwide, Inc. KRO. While Compass Minerals holds a Zacks Rank #1 (Strong Buy), both Dow and Kronos carry a Zacks Rank #2 (Buy).

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