Airgas Riddled with Near-Term Challenges - Analyst Blog

On May 22, 2014, we issued an updated research report on Airgas, Inc. ARG. This supplier of industrial, medical and specialty gases and hardgoods posted adjusted earnings of $1.15 a share in fourth-quarter fiscal 2014 (ended Mar 31, 2014), up 1% year over year, short of the Zacks Consensus Estimate of $1.19 as well as the management's earnings guidance of $1.18–$1.23 per share.

Airgas' fourth-quarter results were weaker than expected as severe weather conditions across most of the U.S. coast had an incremental negative impact of $0.02 per share and the unfavorable year-over-year impact on earnings related to the refrigerants business was $0.03 greater than anticipated. However, these factors aside, management stated that results were also affected due to sluggish business conditions. However, the year-over-year rise in earnings was driven by the realization of SAP-related benefits and share repurchases completed in the second half of fiscal 2013.

Airgas' estimates have thus undergone negative revisions following its disappointing fourth-quarter results reported on May 2. Out of the 13 estimates for the company, 12 have gone down over the last 30 days for fiscal 2014. The Zacks Consensus Estimate for fiscal 2014 has gone down 6% to $5.11.

The Zacks Consensus Estimate for fiscal 2014 is within the company's guidance of $5.00 to $5.20, which reflects a 6% to 10% year-over-year rise. The guidance includes an 11–16 cents per share negative year-over-year impact from variable compensation reset following a below-budget year. Airgas currently expects its refrigerants business to make a slightly favorable contribution to its year-over-year earnings per share growth in fiscal 2015.

Among the challenges faced by the company is the helium supply constraint encountered by the global industrial gas industry. During fiscal 2013, Airgas' helium suppliers continued to fall short of their volume commitments and the company expects some level of supply chain disruption during fiscal 2015 as well.

To add to its woes, The American Institute of Architects' AIA Architecture Billings Index (ABI) declined to 48.8 in Mar 2014, from 50.7 in February. Any reading below 50 signifies a decline in billings and this was the third below-50 reading over the past 10 months. Furthermore, weak public construction spending remains the most alarming risk to non-residential recovery, particularly in the light of further government spending cuts. This makes the expected recovery in the non-residential market seem uncertain, thereby making prospects bleak for Airgas.

For 2014, Airgas acquired 11 businesses with $82 million in annual sales. This includes the acquisition of Illinois-based The Encompass Gas Group, Inc. ??? one of the largest privately owned suppliers of industrial, medical and specialty gases and related hardgoods in the United States ??? in Oct 2013. Airgas, however, fell short of its target of acquisitions with sales of $150 million for fiscal 2014. Activities on the acquisition front will pick up only when the U.S. economy shows signs of acceleration.

Airgas currently carries a Zacks Rank #4 (Sell).

Key Picks from the Sector

Some better-performing stocks that are worth considering in this sector include Compass Minerals International Inc. CMP, L'Air Liquide SA (AIQUY) and PetroLogistics LP PDH. While Compass Minerals sports a Zacks Rank #1 (Strong Buy), L'Air Liquide SA and PetroLogistics carry a Zacks Rank #2 (Buy).