On August 1, Air Products & Chemicals (APD) released their Q3 results, reporting EPS of $1.65 which beat estimates by $0.06, and revenues of $2.12 billion which beat estimates by $60 million. The share price jumped approximately 4.7% in reaction to these results.
It may now seem that Air Products & Chemicals is no longer trading cheaply, as it is now trading just 1.56% shy of its 52-week high of $150.45. However, it is my view that this is not the case, and that investors have an opportunity to start a long-term position with this global gas giant.
Founded in 1940, Air Products & Chemicals, Inc. is an industrial gases company which is engaged in the provision of atmospheric gases, process gases, and in the provision of related equipment to manufacturing markets such as electronics, food and beverage, metals, petrochemicals and refining.
Air Products & Chemicals divides its operations into five segments: Industrial Gases-America; Industrial Gases-Asia; Industrial Gases-EMEA (Europe, Middle East, and Africa); Industrial Gases-Global; and Corporate. In 2016, they divested their Materials Technologies segment into a stand-alone company, Versum Materials (VSM), in an effort to become a purely industrial gases company. A breakdown of the 2016 consolidated sales, which totalled $9.524 billion, shows their global diversity by segment.
|Business Segment||Percentage of consolidated sales|
|Materials Technologies (divested October 1, 2016)||21%|
Air Products & Chemicals is headquartered in Allentown, Pennsylvania, has a workforce of approximately 16,000 employees, and has a market capitalization of $32.28 billion.
The gas industry is essentially a global oligopoly. The reason why I state this is because in order to supply gas on a vast scale, a firm requires technical expertise and exorbitant start-up costs, which locks out most prospective competitors. For this reason, four companies dominate the gas business worldwide: L'Air Liquide SA (OTCPK:AIQUF) (OTCPK:AIQUY); Praxair (PX), the Linde Group (OTCPK:LNAGF) (LNEGY); and Air Products & Chemicals. And because the alternatives are so few, customers will stick with their region's gas supplier, further ensuring that these companies maintain and grow their customer base with ease.
The prospects for Air Products & Chemicals as a business are therefore radiant, as the revenue and net income figures for the past five years confirm (Net income for 2016 must take the spin-off of Versum into account).
|Year||Revenue ($)||Net Income ($)|
Going forward, Air Products & Chemicals have a number of projects that will enable it to continue earning consistent revenue - earlier this month they won a deal with Huntsman Corporation (HUN) to build, own and operate a steam methane reformer and cold box that will supply carbon dioxide, methane and steam to Huntsman's operations in Geismar, Louisiana. The facility, which will be linked to Air Product's & Chemicals' 600-mile-long hydrogen pipeline which runs from Houston to New Orleans, should be operational by 2020.
Additionally, in June Air Products & Chemicals also announced a joint venture with the North American branch of fellow gas firm Linde (OTCPK:LNAGF) (LNEGY). The venture, named East Coast Nitrogen, will invest $60 million into the construction of a facility in Glenmount, New York, which will house an air separation unit and industrial gas liquifier. The facility, which will produce liquid argon, liquid nitrogen and liquid oxygen is expected to be commercially viable by December 2018.
As stated at the outset, Air Products & Chemicals is trading just 1.56% shy of its 52-week high of $150.45, which alone would make it seem overvalued, particularly since the price rose 4.7% just after the Q3 results were released. Combined with the fact that it currently has a price-to-earnings ratio of 24.71, a forward P/E ratio of 21.73, and one could be forgiven for thinking it is overvalued at this time.
However, Air Products & Chemicals is not deviating greatly from its five-year average P/E ratio of 22.8, nor its five-year average dividend yield of 2.51%, as it currently offers a dividend yield of 2.57% with a payout ratio of 23.60%, which is low enough to ensure that it can maintain its record of paying consecutively rising dividends to shareholders going forward, as it has since 1983. These facts suggest to me that Air Products & Chemicals is a buy at this time.
Furthermore, as noted by TheStreet (TST), Air Products & Chemicals is actually trading at a discount to both the chemical industry's average P/E ratio of 32.30 and to the S&P 500's (SPY) average P/E ratio of 24.68. This serves to corroborate my view that Air Products & Chemicals is a good deal right now.
Air Products & Chemicals may be trading near a 52-week high, but that does not rule it out as a prospective buy right now. It is trading in-line with its own five year averages, offers a sustainable dividend, holds a secure position within an oligopolic industry, and has projects that hold the promise of delivering future growth. Consequently, it is a stock worthy of serious consideration in a long-term portfolio.
DISCLAIMER: The author is not a financial professional and accepts no responsibility for any investment decisions a reader makes. This article is presented for information purposes only. Furthermore, the figures cited are the product of the author's own research and may differ from those of other analysts. Always do your own due diligence when researching prospective investments.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.