On Feb 7, we downgraded our recommendation from Neutral to Underperform on Airgas, Inc. (ARG) as its estimates have undergone negative revisions following the third-quarter earnings results and trimmed fiscal 2014 guidance. Helium supply constraints, larger-than-expected R-22 impacts and uncertainty in the construction sector also remain headwinds for this supplier of industrial, medical and specialty gases, and hardgoods.
Why Downgraded?
Airgas, Inc. posted adjusted earnings of $1.18 a share in third-quarter fiscal 2014 (ended Dec 31, 2013), up 13% year over year. For fiscal 2014, Airgas lowered its earnings outlook to $4.75–$4.80 from its previous band of $4.85–$5.00. The reduced outlook reflects choppy end-market trends, weaker-than-expected activity in January 2014 due to unfavorable weather and higher healthcare and e-Business/telesales investments and increased headwind in refrigerants.
Airgas also anticipates that it will fall short of its fiscal 2016 sales target of $6.5 billion, given the sluggish industrial growth as well as slower acquisition activity to date. The company, however, remains optimistic about achieving the lower-end of its margin goal of 15%.
Among other 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. Airgas expects an estimated 17 cents per share (up from the prior expectation of 15 cents per share) year-over-year negative impact in fiscal 2014 related to R-22 pricing and volume following the EPA's ruling.
Airgas noted that in construction, new projects have been slower to gain traction, and the extremely cold weather prevents welding activity on general daily construction projects that make up a good portion of its construction segment.
Economic indicators are also giving mixed signals. Private non-residential construction spending has declined, with the most recent reading in Nov 2013 being 7% lower than last year. Overall, the construction sector will continue to be a drag on Airgas’ results.
Other Stocks to Consider
Airgas retains a short-term Zacks Rank #4 (Sell). Some better-ranked stocks in the chemical-diversified sector include Methanex Corp. (MEOH) Northern Technologies International Corp. (NTIC) and Cytec Industries Inc. (CYT). While Methanex and Northern Technologies hold a Zacks Rank #1 (Strong Buy), Cytec holds a Zacks Rank #2 (Buy).
To read this article on Zacks.com click here.
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment