On Nov 5, we retained our Neutral recommendation on
). While the company should gain from its cost reduction
measures, new business deals and strategic investments, we remain
on the sidelines considering high energy costs and weakness in
its electronics and performance materials business.
The industrial gas giant's fourth-quarter fiscal 2013 (ended Sep
30, 2013) adjusted earnings from continued operations of $1.47 a
share, reported on Oct 29, met the Zacks Consensus Estimate.
Profit was dragged down by sizable charges associated with the
company's cost reduction program.
Sales edged down 0.7% year over year to $2,586.5 million as
gain in the core merchant gases franchise was masked by declines
in other businesses. It missed the Zacks Consensus Estimate of
ASAHI KASEI CP (AHKSY): Get Free Report
AIR PRODS & CHE (APD): Free Stock Analysis
METHANEX CORP (MEOH): Free Stock Analysis
PPG INDS INC (PPG): Free Stock Analysis
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Air Products benefits from a diverse customer base, sustained
pricing power and cost-reduction measures. New business deals and
strategic investments are expected to support results in fiscal
2014. The acquisition of a 67% stake in Chilean industrial gas
company, Indura S.A., has ushered in substantial growth
opportunity for Air Products. Moreover, the EPCO buyout
complements Air Products' goal of expanding its portfolio of
industrial gases offerings in North America.
We are also encouraged by the incremental opportunities in
liquefied natural gas (LNG) market. Air Products has been chosen
for a major off-shore LNG project in Malaysia, representing a
major opportunity for its LNG technology and equipment.
Air Products is also actively engaged in project development
activities in its Tonnage Gases division. The company is making
significant progress in its hydrogen business and recently
announced its plans to build a new world-scale hydrogen
production plant in Canada.
Air Products is also keeping a tight control on expenses and
undertaking work process improvement initiatives. Moreover, it
remains committed to maximize returns to shareholders.
However, Air Products' Electronics and Performance Materials
segment is expected to witness soft demand with delays in new fab
construction and weak outlook for silicon processing. Profits are
expected to fall in the Tonnage Gases division due to lower
volume and higher maintenance spending. Helium volumes also
remain weak due to feedstock supply constraints and weak packaged
gases demand in Europe.
Moreover, higher energy costs pose a threat to margin expansion.
Higher power costs in the merchant business and maintenance costs
is weighing on Air Products' bottom line. Shutdown of the
polyurethane intermediates (PUI) business and higher maintenance
costs are expected to have a combined earnings headwind of 15
cents per share in fiscal 2014. We also take into account the
company's high debt level.
Other Stocks to Consider
Other companies in the chemical industry with favorable Zacks
Asahi Kasei Corp.
PPG Industries Inc.
). While both Asahi Kasei and Methanex hold a Zacks Rank #1
(Strong Buy), PPG Industries retains a Zacks Rank #2 (Buy).