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We are retaining our Neutral rating on industrial gas giant Air Products (APD - Analyst Report) following our assessment of its second-quarter fiscal 2013 (ended Mar 31, 2013) results. We continue to tread with caution considering high energy costs, volume pressure in the Merchant Gases division and weakness in the electronics business.

Why Maintained?

Air Products’ second quarter earnings from continued operations of $1.37 a share were in line with the Zacks Consensus Estimate. Revenues rose 6% year over year to $2,484.2 million aided by acquisitions, but missed the Zacks Consensus Estimate of $2,585 million. Management cut its earnings guidance for fiscal 2013 citing challenging economic conditions.

Air Products 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., has ushered in substantial growth opportunity for Air Products. We are also encouraged by the incremental opportunities in liquefied natural gas (LNG) market. Air Products has been chosen for a major off-shore LNG project in Malaysia, representing a major opportunity for its LNG technology and equipment.

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. Air Products’ Board, in Mar 2013, approved an 11% hike in its dividend.

However, volume in the core Merchant Gases segment may remain under pressure partly due to weakness across a number of markets in Europe. Helium supply constraints remain another concern. Air Products’ electronics business may also 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 with favorable Zacks Rank include Shin-Etsu Chemical Co., Ltd. , Celanese Corporation (CE - Analyst Report) and Methanex Corporation (MEOH - Analyst Report). While Shin-Etsu Chemical retains a Zacks Rank #1 (Strong Buy), both Celanese and Methanex hold a Zacks Rank #2 (Buy).

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