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Analyst Blog

On Sep 26, we initiated our coverage on Airgas, Inc. (ARG - Analyst Report) 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 cutbacks.

Other Stocks to Consider

Airgas retains a short-term Zacks Rank #3 (Hold). Other stocks with favorable Zacks Rank are Ferro Corporation (FOE - Snapshot Report), Westlake Chemical Corp. (WLK - Snapshot Report) and Akzo Nobel NV (AKZOY). Ferro Corporation and Westlake Chemical both hold a Zacks Rank #1 (Strong Buy), while Akzo Nobel holds a Zacks Rank #2(Buy).
 

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