INVESTMENT THESIS
Air Products & Chemicals Inc. (NYSE: APD) with a price target of $360. Despite weak results in fiscal 4Q20 due to the pandemic, we believe that performance will begin to improve. We also believe that APD is extremely well positioned to manage through this period due to its stable cash flows, lower-than-average debt, and investment-grade credit rating.
Over the long term, we expect APD to report above-peer-average earnings growth and note that the company has boosted EPS at an 11% compound annual rate since 2014 and raised dividends at a 10% rate over the past 20 years. We view this as evidence of the company’s shareholder-friendly policies and sustainable business model.
RECENT DEVELOPMENTS
On November 11, Air Products reported adjusted fiscal 4Q20 earnings from continuing operations of $447 million or $2.19 per diluted share, down from $503 million or $2.27 per share. EPS matched our estimate but fell short of the consensus estimate of $2.21.
The lower results reflected weaker volumes and the negative effects of energy cost pass-throughs (largely due to the effects of the global pandemic), which more than offset the positive effects of higher pricing and currency translation.
For the fourth-quarter, Air Products estimated that COVID-19 negatively impacted total sales by approximately 5%, which translated into an EPS impact of $0.15-$0.20 per share.
Fourth-quarter 2020 revenue increased 2% to $2.320 billion.
In Industrial Gases Americas, 4Q revenue declined 3% from the prior year to $912 million, reflecting negative cost pass-throughs (down 1%), unfavorable currency translation (down 1%) and lower volumes (down 3%), which more than offset the positive contribution of higher prices (up 2%). Looking ahead, existing onsite business (about 2/3 of sales) are expected to remain stable, however, COVID-19 is negatively impacting merchant volumes by approximately 5%. Operating income of $239 million was down 8% from the prior-year quarter. The segment operating margin fell 160 basis points to 26.2%, mostly due to higher maintenance costs in the quarter.
Industrial Gases EMEA posted 4Q sales of $505 million, up 3% with the prior-year quarter, reflecting positive pricing (up 2%) and favorable currency translation (up 4%), which more than offset the negative impact of energy pass-throughs. Looking ahead, the existing onsite business (about 40% of sales) is expected to remain stable but COVID-19 is currently negatively impacting merchant volumes by about 10%. Operating income increased 2% to $123 million. The operating margin decreased 30 basis points to 24.4%.
In Industrial Gases Asia, 4Q20 sales decreased 2% to $714 million, driven by lower volumes (down 5%) and negative energy cost pass-throughs (down 1%). This more than offset the positive effects of higher prices (up 2%) and the favorable effects of currency translation (up 2%). Looking ahead, current business conditions are now trending to company expectations.
For all of fiscal 2020, the company reported adjusted EPS of $8.38, compared to $8.22 per diluted share in fiscal 2019.
EARNINGS & GROWTH ANALYSIS
Air Products is not providing forward-looking guidance given the uncertain impact of COVID-19. We expect capital expenditures roughly in line with 2020 levels.
At the same time, we are introducing a FY22 EPS estimate of $10.67 per share, implying approximately 14% profit growth versus our 2021 estimate. Our forecast assumes a gradual return to pre-COVID operating conditions during the year. The consensus is presently $10.59.
FINANCIAL STRENGTH & DIVIDEND
During the third quarter of 2020 (ended April 30), APD completed a $5 billion debt offering, consisting of both U.S. and euro-denominated notes. Air Products intends to use the net proceeds from the notes offerings to repay upcoming debt maturities and for general corporate purposes.
Air Products had cash and equivalents of $5.25 billion at the end of 4Q20, up from $2.25 billion at the end of 4Q19. It has an undrawn $2.69 billion credit line.
The company repurchased $462 million of its stock in FY13, but made no repurchases in FY14-FY20. Looking ahead, we expect APD to concentrate on higher-yielding investments (M&A and expansion projects) rather than on stock buybacks.
On January 23, 2020, Air Products announced a 15% increase in its quarterly dividend to $1.34 per share or $5.36 annually. The stock currently yields about 2.0%. APD has raised its dividend for 38 straight years, with compound annual growth of 10% over the last 15 years.
MANAGEMENT & RISKS
Seifi Ghasemi became APD’s chairman, president and CEO in July 2014, succeeding John E. McGlade. Mr. Ghasemi became a member of the Air Products board in September 2013. He was previously chairman and CEO of Rockwood Holdings, a provider of inorganic specialty chemicals and advanced materials. Prior to joining Rockwood, Mr. Ghasemi was chairman and CEO of GKN Sinter Metals. He also held senior management positions at BOC Group, which is now part of Linde AG.
COMPANY DESCRIPTION
Air Products is a leading producer of industrial gases. It provides atmospheric and process gases and related equipment to refining and petrochemical, metals, electronics, and food and beverage companies. Air Products is also the world’s leading supplier of liquefied natural gas process technology and equipment.
VALUATION
Air Products’ shares have traded between $167.43 and $327.89 over the past 52 weeks and are currently above the midpoint of that range. The shares are trading at 28.9-times our FY21 EPS forecast and at 25.4-times our FY22 forecast, compared to a 24-year annual average range of 17-24.
They are also trading at a trailing price/book multiple of 3.7, at the high end of the historical range of 2.7-3.8; at a price/sales multiple of 3.6, above the high end of the historical range of 1.9-2.6; and at a price/cash flow multiple of 14.0, above the high end of the range of 9.2-13.5. The price/EBITDA multiple is 13.0, compared to a range of 8.0-10.8.
Despite these relatively high valuation measures, we view APD as one of the ‘best-in-class’ providers of industrial gases in the world. With a limited number of competitors within this space, we see Air Products as holding a dominant position within the sector and are comfortable with current valuation metrics.
On November 24 at midday, BUY-rated APD traded at $284.17, up $8.91.
Source: Argus
