On Feb 5, we reaffirmed our Neutral recommendation on
). While the company should continue to gain from its cost
reduction measures, new business deals and strategic investments,
we maintain a cautious view considering high energy costs and
weakness in its tonnage gases business.
Why a Hold Rating?
The industrial gas giant's earnings for first-quarter fiscal 2014
(ended Dec 31, 2013), reported on Jan 28, narrowly beat the Zacks
Consensus Estimate while sales missed. Profit rose year over year
on the company's cost reduction initiatives. Decline in the
Tonnage Gases division was offset by gains in other businesses.
The company backed its earnings guidance for the full year.
Air Products, a Zacks Rank #3 (Hold) stock, 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 its goal of expanding its portfolio of industrial
gases offerings in North America.
We are also encouraged by the incremental opportunities in the
liquefied natural gas (LNG) space. Air Products has been chosen
for a major off-shore LNG project in Malaysia, representing a
major opportunity for its LNG technology and equipment. Moreover,
it recently agreed to supply technology and equipment for the
largest LNG production and exports facility in Russia.
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 is constructing
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' tonnage gases business continues to face
challenges due to maintenance outages. Profits are expected to
fall in this division due to lower volume and higher maintenance
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
may weigh on Air Products' bottom line. In addition, shutdown of
the polyurethane intermediates (PUI) business is expected to have
an earnings headwind of 10 cents per share in fiscal 2014. We
also take into account the company's high debt level.
Other Stocks to Consider
Some better-ranked chemical stocks include
Northern Technologies International Corp.
The Dow Chemical Co.
). While both Methanex and Northern Technologies International
hold a Zacks Rank #1 (Strong Buy), Dow Chemical retains a Zacks
Rank #2 (Buy).
AIR PRODS & CHE (APD): Free Stock Analysis
DOW CHEMICAL (DOW): Free Stock Analysis
METHANEX CORP (MEOH): Free Stock Analysis
NORTHERN TECH (NTIC): Free Stock Analysis
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