We are downgrading our rating on Industrial gas giant
Air Products and Chemicals Inc.
) to Underperform factoring in the challenges it may face in
fiscal 2013. Adjusted earnings (from continued operations) of
$1.42 a share for fourth-quarter fiscal 2012 missed the Zacks
Consensus Estimate by a couple of cents. Profit, as reported,
slid 57% year over year on account of hefty impairment charges
related to the restructuring of the company's photovoltaic
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Revenues, however, rose 4% year over year to $2,606 million and
beat the Zacks Consensus Estimate. The company witnessed sluggish
manufacturing activity in the quarter. Management's guidance for
fiscal 2013 reflected economic uncertainty and depressed growth.
Air Products benefits from a long-term take-or-pay contract, a
consolidated industry structure, diverse customer base and
sustained pricing power. The company's healthy project backlog
strongly positions it to achieve its long-term growth target.
New business wins in the Merchant Gases segment should support
results in fiscal 2013. Moreover, Air Products continues with its
global cost reduction plan. The company is also offering healthy
returns to its shareholders in the form of incremental dividends.
However, sluggish economic conditions across the U.S. and Europe
may continue to impact the demand for the company's products.
Volume in the Merchant Gases division is expected to remain under
pressure, partly due to the recessionary conditions in Europe.
Moreover, the Electronics and Performance Materials segment is
expected to witness lower seasonal demand in first-quarter fiscal
2013 while profits are expected to fall in the Tonnage Gases
division due to lower volume and higher maintenance spending.
Sluggish U.S. manufacturing growth due to high unemployment and
the concerns over the U.S. fiscal cliff coupled with the slowdown
in Asia is expected to impinge results in fiscal 2013.
In addition, currency headwinds and pension expenses are expected
to weigh on earnings moving ahead. Air Products generates a
considerable amount of revenues outside the U.S., and therefore,
remains exposed to foreign exchange fluctuations. Higher energy
costs also pose a threat to margin expansion. These factors are
reflected in our rating revision on the stock.
Air Products, which competes with
) among others, currently retains a Zacks #4 Rank, which
translates into a short-term Sell rating.