On Dec 4, we maintained our Neutral recommendation on Airgas, Inc. (ARG) based on benefits from a strong acquisition pipeline, soon-to-be-completed SAP implementation, focus on strategic products and recovery in the nonresidential construction. However, helium supply constraints, larger-than-expected R-22 impact and anticipated weakness in the holiday season remain concerns for this supplier of industrial, medical and specialty gases, and hardgoods.
Why at Neutral?
Airgas’ fiscal second quarter adjusted earnings per share rose 19% to $1.25, and net sales increased 4% to $1.28 billion. For fiscal 2014, Airgas lowered its earnings outlook to $4.85-$5.00 from its previous band of $5.00 to $5.15. Lower year-over-year organic sales growth rate assumptions due to lack of confidence stemming from political uncertainty and the government shutdown in October led to the cut. Furthermore, the company had taken a cautious stance anticipating weakness in the holiday season following weaker-than-expected sales in September and October.
Among the positives, Airgas has grown through acquisitions and has set a target of $150 million in acquired sales for fiscal 2014. So far in fiscal 2014, Airgas purchased six businesses, whose annual sales have historically been about $67 million. Management is optimistic about reaching its fiscal 2014 target on the back of a strong pipeline.
Strategic product sales (safety products, CO2, medical, bulk and specialty gas) now generate over 40% of Airgas’ sales, and continue to be an important part of Airgas’ value proposition to customers. Moreover, from a product standpoint, these strategic products have a strong growth profile due to their use in favorable customer segments, application development, increasing environmental regulation, strong cross-sell opportunities or a combination of these factors.
Airgas continued its phased, multi-year rollout of its highly-customized SAP enterprise information system during fiscal 2013, with over 90% of its Distribution business segment and all of its regional distribution businesses operating successfully on SAP as of Jun 30, 2013. Through the implementation of SAP, Airgas expects to realize a minimum of $75 million in annual run-rate operating income benefits.
Non-residential (energy & infrastructure) construction sector accounts for 14% of Airgas’ sales. Airgas is seeing signs that nonresidential construction activity will improve next year. Order flow has started for a couple of large projects and a number of rumored large projects have now moved into the planning and permitting stages. Airgas will benefit if it can win these projects.
Among the challenges, the global industrial gas industry continues to face helium supply constraints. 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 2014 as well.
In March, the U.S. Environmental Protection Agency (EPA) unexpectedly issued a ruling allowing for increased R22 refrigerant production in 2013 contrary to industry and company expectations of further declines. This ruling had a greater-than-expected impact on Airgas’ first half 2014 results. In connection with this, Airgas expects an estimated 15 cents year-over-year negative impact in fiscal 2014.
Other Stocks to Consider
Airgas retains a short-term Zacks Rank #4 (Sell). Some better-ranked stocks in the chemical-diversified sector include Asahi Kasei Corporation (AHKSY), Johnson Matthey plc (JMPLY) and Methanex Corporation (MEOH). All these stocks hold a Zacks Rank #2 (Buy).
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