Earnings Preview: Air Products

Industrial gas giant Air Products and Chemicals Inc. ( APD - Analyst Report ) is scheduled to report its fourth-quarter fiscal 2012 results before market opens on Friday, October 19. Analysts polled by Zacks currently expect revenues of $2,574 million and earnings of $1.44 a share on average for the quarter. The Zacks Consensus Estimate for earnings calls for an estimated year-over-year decline of 4.97%.

The Pennsylvania-based company, in its third quarter call, noted that it anticipates fourth quarter adjusted earnings from continuing operations to be in the range of $1.42 and $1.47 per share. Factoring in the cloudy economic environment and negative currency impact, the company slashed its adjusted earnings (from continuing operations) target to $5.40 to $5.45 per share from its earlier view of $5.47 to $5.60 per share.

Air Products witnessed a surge in its profit in the third quarter following two straight quarters of decline. It will be interesting to see how the company will fare in the fourth quarter in a difficult operating backdrop. Weak end-market demand in Europe, a slowdown in key Asian markets and currency headwinds continue to pose challenges for Air Products.

Third Quarter Revisited

Air Products posted third quarter adjusted (excluding one-time items) earnings from continued operations of $1.41 a share, matching the Zacks Consensus Estimate. Consolidated net income, as reported, soared 48% year over year to $484.5 million (or $2.26 a share) boosted by lower costs and one-time gains, which more than offset a decline in sales.

Revenues fell 5% year over year to $2,340.1 million, missing the Zacks Consensus Estimate. Sales declined on account of challenging conditions in Europe and Asia and unfavorable currency exchange impact.

Management noted that recent acquisitions coupled with the divestiture of Homecare business will position the company for future growth despite the weak macroeconomic environment.

Estimate Revisions Trend

Agreement

Estimate for the fourth quarter elicit absolute lack of movements over the past week with none (out of 14 analysts) revising their forecasts in either direction. There have been a couple of downward revisions over the past month with no reverse movements.

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

Magnitude

Estimate for the fourth quarter remained stationary (at $1.44 a share) over the past week and month. For fiscal 2012, estimate declined by a penny over the past month while remaining unchanged (at $5.42 a share) over the last week.

Surprise History

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.

What to Expect in 4Q

Air Products is expected to witness improved volume in the Merchant Gases segment in the fourth quarter. In addition, higher LNG backlog is expected to support results in the Equipment and Energy division. The company continues with its global cost reduction plan and is expected to see continued benefit from this program in the quarter.

However, sluggish economic conditions across the U.S. and Europe may continue to impact the demand for the company’s products in the fourth quarter. Moreover, unfavorable currency exchange translation (stemming from a stronger dollar) is expected to hurt earnings for fiscal 2012.

While the acquisition of Indura S.A. is expected to usher in substantial growth opportunity for Air Products and place it as Latin America’s second largest industrial gas producer, the transaction is expected to be dilutive in the fourth quarter.

Our Recommendation

Air Products’ healthy project backlog strongly positions 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.

New business wins in the Merchant Gases segment should drive results in the near term. We are also encouraged by the increasing opportunities in liquefied natural gas (LNG) market. However, soaring energy and raw material costs pose a threat to margin expansion.

Air Products, which competes with Praxair Inc. ( PX - Analyst Report ) , currently holds a short-term Zacks #2 Rank (Buy). We have a long-term Neutral recommendation on the stock.