On Dec 4, we maintained our Neutral recommendation on
) 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
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
Johnson Matthey plc
). All these stocks hold a Zacks Rank #2 (Buy).
ASAHI KASEI CP (AHKSY): Get Free Report
AIRGAS INC (ARG): Free Stock Analysis Report
JOHNSON MATTHEY (JMPLY): Get Free Report
METHANEX CORP (MEOH): Free Stock Analysis
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