On Sep 26, we initiated our coverage on
) with a Neutral recommendation based on benefits from a strong
acquisition pipeline, soon-to-be-completed SAP implementation,
focus on strategic products, further share repurchases and price
hikes. However, helium supply constraints, muted public
construction spending and a larger than expected R-22 impact
remain concerns for this supplier of industrial, medical and
specialty gases, and hardgoods.
Why Neutral Stance?
Airgas' fiscal first quarter adjusted earnings per share rose 1%
to $1.14, and net sales increased 2% to $1.28 billion. For fiscal
2014, the company guided earnings per share between $5.00 and
$5.15, reflecting 15% to 18% annual growth.
Airgas has grown through acquisitions and has set a target of
$150 million in acquired sales for fiscal 2014. Even though only
one small acquisition has been made so far, management is
optimistic about reaching its target in fiscal 2014 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.
Backed by its strong cash flow and financial stability, Airgas
can increase its dividend while continuing to fund its growth
strategies. In Oct 2012, Airgas announced $600 million share
repurchase program, which was completed during the third and
fourth quarters of fiscal 2013. Further share repurchases will
provide support to Airgas' earnings.
Airgas implemented price increase that was effective from Jul 1,
2013. This will help maintain the same store sales growth and
counter higher input and energy costs. The company also remains
focused on reducing its costs associated with production,
cylinder maintenance and distribution logistics.
Among the caveats, the global industrial gas industry continues
to face helium supply constraints. Suppliers have thus applied
helium volume allocations, limiting Airgas ability to supply
helium to its own customers. 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 and unusually cool
spring weather across` most parts of the U.S had a greater than
expected impact on Airgas' first quarter 2014 results. In
connection with this, Airgas expects an estimated 12 cents to 15
cents year-over year negative impact in fiscal 2014.
Furthermore, non-residential (energy & infrastructure)
construction sector accounts for 14% of Airgas sales. Public
construction spending remains depressed due to budget woes and
Other Stocks to Consider
Airgas retains a short-term Zacks Rank #3 (Hold). Other stocks
with favorable Zacks Rank are
Westlake Chemical Corp.
Akzo Nobel NV
). Ferro Corporation and Westlake Chemical both hold a Zacks Rank
#1 (Strong Buy), while Akzo Nobel holds a Zacks Rank #2(Buy).
AKZO NOBEL NV (AKZOY): Get Free Report
AIRGAS INC (ARG): Free Stock Analysis Report
FERRO CORP (FOE): Free Stock Analysis Report
WESTLAKE CHEM (WLK): Free Stock Analysis
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