Air Products Retains Neutral Rec

We are retaining our Neutral rating on leading industrial gas company Air Products and Chemicals Inc ( APD - Analyst Report ) . The company witnessed lower profit and revenues in second-quarter fiscal 2012. Revenues fell on account of lower volumes, reflecting challenging conditions in Europe. Air Products saw lower sales across the board in the quarter.

Moving ahead, management envisions both earnings and sales improving for the remainder of 2012. New business deals are expected to pad profit in 2012.

Air Products, which competes with Praxair Inc. ( PX - Analyst Report ) , among others, benefits from a long-term take-or-pay contract, a consolidated industry structure, diverse customer base and sustained pricing power.

The company’s healthy project backlog and solid bidding activity strongly position it to achieve its long-term growth target. Given its leading position in the gases business, Air Products is well positioned to capitalize on the cyclical recovery in its core industrial end markets.

Air Products remains focused on refinery hydrogen, which yields nearly a third of its revenues. Over the next decade, the company foresees incremental global hydrogen demand and has several refinery projects in the pipeline.

New business wins in the Merchant Gases segment should drive results in the near term. In sync with its global cost reduction plan, Air Products is embarking on headcount reduction, keeping a lid on selling, general and administrative (SG&A) expense and undertaking work process improvement initiatives. The company is also offering healthy returns to its shareholders in the form of incremental dividends.

However, soaring energy and raw material costs pose a threat to margin expansion. To compensate for escalating raw material costs, Air Products has been increasing the price for a range of chemicals it makes for industrial use.

Sluggish economic conditions across the U.S. and Europe may impact the demand for the company’s products in the second half of fiscal 2012. Moreover, Air Products generates a considerable amount of revenues outside the U.S. and therefore is exposed to foreign exchange swings. We are also concerned about Air Products’ high balance sheet leverage.

Air Products currently retains a Zacks #4 Rank, which translates into a short-term Sell recommendation.