On Feb 12, 2013, we upgraded our recommendation on industrial gas giant Air Products (APD - Analyst Report) to Neutral based on its better-than-expected first-quarter fiscal 2013 results and upbeat guidance.
Why the Upgrade?
Air Products posted earnings from continued operations of $1.30 a share, beating the Zacks Consensus Estimate of $1.29. Revenues climbed roughly 10% year over year to $2,562.4 million, also exceeding the Zacks Consensus Estimate of $2,471 million.
Sales were boosted by Indura and DA NanoMaterials acquisitions. Management raised its earnings guidance for fiscal 2013 factoring in the positive impact of share buybacks.
Air Products, which currently carries a short-term Zacks Rank #2 (Buy), benefits from a diverse customer base, sustained pricing power and cost-reduction measures. New business deals and strategic investments are expected to support results in fiscal 2013.
Moreover, the acquisition of a 67% stake in Chilean industrial gas company, Indura S.A., should usher in substantial growth opportunity for Air Products. We are also encouraged by the incremental opportunities in liquefied natural gas (LNG) market.
Air Products has also embarked on headcount reduction, keeping a tight control on expenses and undertaking work process improvement initiatives. Moreover, it remains committed to maximize returns to shareholders.
However, volume in the core Merchant Gases segment is expected remain under pressure partly due to the recessionary conditions in Europe. The electronics business may continue to see weak demand.
Moreover, higher energy costs pose a threat to margin expansion. We also take into account the company’s high debt level.
Other Stocks to Consider
Other companies in the chemical industry having favorable Zacks Rank are Arkema S.A.
) with a Zacks Rank #1 (Strong Buy), BASF SE
) with a Zacks Rank #1 (Strong Buy) and L’Air Liquide SA
) with a Zacks Rank #2 (Buy).