Air Products’ (APD) Strategic Actions Should Bear Fruit

On Nov 7, we issued an updated research report on Air Products (APD). While the industrial gas giant is gaining from its cost reduction actions, strategic investments and new business deals, it is exposed to continued challenges in its tonnage gases business and certain near-term headwinds.

Air Products’ adjusted earnings for fourth-quarter fiscal 2014 (ended Sep 30, 2014), reported on Oct 30, beat the Zacks Consensus Estimate while sales missed. Reported profit slid year over year, hurt by hefty impairment charges. Sales went up in the quarter as a decline in the Tonnage Gases division was more than offset by gains in other businesses.

Air Products, a Zacks Rank #3 (Hold) stock, benefits from a diverse customer base, cost-reduction measures and sustained pricing power. New business deals and strategic investments are expected to support results in fiscal 2015.

Air Products is also keeping a tight control on expenses and undertaking work process improvement initiatives. The company remains on track in delivering on its cost reduction programs, which should support its margins in fiscal 2015.

We are also encouraged by incremental opportunities in the liquefied natural gas (LNG) market. Air Products has been chosen for a major off-shore LNG project in Malaysia, representing a significant opportunity for its LNG offerings. Moreover, the company recently agreed to supply its LNG technology and equipment to Technip for a mid-scale LNG project in Inner Mongolia Province, China. The LNG technology is gaining importance as it meets the increasing global need for cleaner energy.

However, Air Products’ tonnage gases business continues to face challenges. Lower polyurethane intermediates (PUI) volumes and maintenance spending may continue to impact margins in the Tonnage Gases division in the near term. In addition, helium volumes remain weak due to feedstock supply constraints.

High energy costs also pose a threat to margin expansion. Moreover, higher costs associated with maintenance are expected to lead to lower earnings on a sequential basis in first-quarter fiscal 2015. Some additional earnings headwinds are expected to come from spending associated with business restructuring and pension settlement.

Other Stocks to Consider

Other chemical stocks worth considering include Celanese Corporation (CE), Kronos Worldwide, Inc. (KRO) and Trecora Resources (TREC) with all carrying a Zacks Rank #2 (Buy).