Earnings Preview: Air Products

Leading industrial gas company Air Products and Chemicals Inc. ( APD - Analyst Report ) is scheduled to report its third-quarter fiscal 2012 results before market opens on Tuesday, July 24. Analysts polled by Zacks currently expect revenues of $2,455 million and earnings of $1.41 a share on average for the quarter. The Zacks Consensus Estimate for earnings represents an estimated year-over-year decline of 3.2%.

The Pennsylvania-based company witnessed lower profit in the first two quarters of fiscal 2012. It will be interesting to see whether it breaks the declining streak in the third quarter.

Air Products, in its second quarter call, noted that it expects third quarter adjusted earnings from continuing operations to be in the range of $1.40 and $1.45 per share. Adjusted earnings (from continuing operations) target for fiscal 2012 has been pegged at $5.47-$5.60 a share.

With respect to earnings surprises, Air Products has met the Zacks Consensus Estimates in three of the trailing four quarters while missing on one occasion. The company has delivered an average negative earnings surprise of 1.50% over the past four quarters, implying that it has trailed the Zacks Consensus Estimate by that measure.

Second Quarter Recap

Air Products logged second quarter adjusted (excluding one-time charges and gains) earnings of $1.39 a share. Adjusted earnings from continued operations were $1.31 a share. By that measure, the company missed the Zacks Consensus Estimate by a couple of cents. Profit, as reported, fell 2.7% year over year to $296 million (or $1.38 a share).

Net sales nudged down 2% year over year to $2,344 million, also missing the Zacks Consensus Estimate of $2,460 million. The decline was attributable to lower volumes, reflecting challenging conditions in Europe. Air Products saw lower sales across the board in the quarter.

Estimate Revisions Trend

Agreement

Estimates for Air Products elicit limited movements. For the third quarter, 1 analyst (out of 14) has lowered his/her forecast over the past month without any reverse movements. There were no revisions in either direction over the last week.

On a similar note, 1 analyst (out of 13) has chopped his/her estimate for fiscal 2012 over the last 30 days with no upward movements. No activity was witnessed over the past 7 days.

Magnitude

Estimate for the third quarter remained stationary over the past week and month. A similar trend applies for fiscal 2012 with estimate remaining unchanged (at $5.52 a share) over these periods.

Our View

Air Products’ 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, the company is well positioned to capitalize on the cyclical recovery in its core industrial end markets. Moreover, new business deals are expected to support profit in 2012. Air Products anticipates both earnings and sales to rise in 2013.

However, soaring energy and raw material costs pose a threat to margin expansion. In addition, sluggish economic conditions across the U.S. and Europe may impact the demand for the company’s products in the third quarter.

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.

We currently have a long-term Neutral recommendation on Air Products. The company, which competes with Praxair Inc. ( PX - Analyst Report ) , has a short-term Zacks #3 Rank (Hold).