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Air Products Reaffirmed at Neutral

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We are maintaining our Neutral recoomendation on Industrial gas giant Air Products and Chemicals Inc. (APD - Free Report) . Adjusted earnings of $1.41 a share for third-quarter fiscal 2012 matched the Zacks Consensus Estimate. Revenues fell 5% year over year to $2,340.1 million, missing the Zacks Consensus Estimate.

Revenues declined on account of challenging conditions in Europe and Asia and unfavorable currency exchange impact. Moving ahead, management expects recent acquisitions coupled with the divestiture of Homecare business will position the company for future growth despite the weak macroeconomic environment.

Air Products, which competes with Praxair Inc. , 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 strongly positions 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. We are also encouraged by the increasing opportunities in liquefied natural gas (LNG) market.

Moreover, Air Products continues with its global cost reduction plan. 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 continue to impact the demand for the company’s products. Moreover, Air Products generates a considerable amount of revenues outside the U.S., and therefore, is exposed to foreign exchange fluctuations.

Unfavorable currency exchange translation (stemming from a stronger dollar) hit the company’s top line in the most recent quarter. Air Products has reduced its adjusted earnings per share target for fiscal 2012 factoring in the currency headwinds and slower economic growth.

Our recommendation is backed by a Zacks #3 Rank, which translates into a short-term Hold rating.


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