Air Products & Chemicals Inc. (APD - Analyst Report) has signed a long-term contract for supplying bulk gases to Xiamen Tianma Microelectronics, which is an affiliate of Tianma Microelectronics Co., a leading small and medium-sized TFT-LCD manufacturer in China.
Under the agreement, Air Products will supply Xiamen Tianma with ultra high-purity nitrogen and oxygen, hydrogen, argon, and helium for its new facility at Xiamen Xiang'an Industrial Park in the Fujian Province.
The facility is China's first 5.5 Generation low-temperature polysilicon (LTPS) thin-film transistor liquid crystal display (TFT-LCD) and color filter production line. Air Products’ deal with Tianma does not come as a surprise considering that the company was already supplying bulk gases to Tianma's facility in Shanghai and electronics materials to its Chengdu plant.
Moreover, the new contract strengthens Air Products’ presence in China as well as its position in the lucrative and rapidly growing TFT-LCD market. The company has been plying its trade in the global electronics industry for more than four decades, establishing a lead over its peers in TFT-LCD markets and the semiconductor industry in emerging economies such as China.
The deal should provide some relief to Air Products’ investors who have seen the stock lose almost 5% of its value so far this year. In comparison, arch-rival Airgas (ARG - Analyst Report) has gained almost 13%, eclipsing the S&P 500’s gains by more than twice.
Air Products witnessed a decline in profits and revenues in the recently reported second quarter of 2012. The company’s adjusted earnings from continued operations came in at $1.31 a share, missing the Zacks Consensus Estimate of $1.33. In absolute terms, profits fell 2.7% to $296 million in the quarter from $304.3 million in the year-ago period.
A challenging environment in Europe coupled with lower sales volumes affected Air Products’ top line in the second quarter. The company’s revenues went down 2% to $2,344 million in the quarter, missing the Zacks Consensus Estimate of $2,460 million.
However, Air Products anticipates its earnings and revenues to improve going forward as it expects to sign new deals in 2012 to support its top-line growth. It anticipates adjusted earnings from continuing operations in the third quarter to be in the range of $1.40–$1.45 per share. For fiscal 2012, the company expects to earn between $5.47 and $5.60 per share on an adjusted basis from continuing operations.
Based in Pennsylvania, Air Products benefits from a long-term take-or-pay contract, consolidated industry structure, diverse customer base and sustained pricing power. However, soaring energy and raw material costs pose a threat to margin expansion. In order to compensate for the escalating raw material costs, the company has been increasing the price for a range of chemicals it manufactures for industrial use.
Air Products faces stiff competition from Praxair Inc. (PX - Analyst Report) and The Linde Group. The company currently retains a Zacks #5 Rank, reflecting a short-term (1 to 3 months) Strong Sell rating. Currently, we have a long-term (more than 6 months) Neutral recommendation on the stock.