We are reaffirming our Neutral rating on leading industrial-gas company Air Products and Chemicals Inc (APD). Its first-quarter 2012 earnings of $1.36 matched the Zacks Consensus Estimate. Sales crept up 1% year over year to $2.4 billion, missing the Zacks Consensus Estimate.
Revenues increased narrowly as higher sales from Tonnage Gases and Performance Materials businesses were masked by lower equipment sales. During the quarter, Air Products reached an agreement with The Linde Group, under which the latter will purchase the company’s Homecare businesses in Belgium, Germany, France, Portugal and Spain.
Air Products offers industrial gases as well as a variety of polymer and performance chemicals and serves technology, energy, industrial and health care customers globally. The company competes with Praxair Inc. (PX) among others.
Air Products’ recent orders, healthy project backlog and solid bidding activity strongly position it to achieve its long-term growth target. Given its leading position in the gases business, the company is well positioned to capitalize on the cyclical recovery in its core industrial end-markets.
Air Products remains focused on refinery hydrogen, which yields nearly a third of its revenues. Over the next decade, the company foresees incremental global hydrogen demand and has seven refinery projects in the pipeline.
New business wins in the Merchant Gases segment should drive results in the near term. In sync with its global cost reduction plan, Air Products is embarking on headcount reduction, keeping a tight control on selling, general and administrative (SG&A) expense and undertaking work process improvement initiatives. The company is also offering healthy returns to its shareholders in the form of incremental dividends.
However, soaring energy and raw material costs pose a threat to margin expansion. To compensate for escalating raw material costs, Air Products has been increasing the price for a range of chemicals it makes for industrial use.
Moreover, the company expects sluggish economic conditions across the U.S. and Europe to impact the demand for its products, and therefore, its results in second-quarter 2012. We are also concerned about Air Products’ high balance sheet leverage. Air Products currently retains a Zacks #4 Rank, which translates into a short-term “Sell” recommendation.
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