The four largest suppliers of industrial gases have a global market share of 80%. The US supplier Air Products & Chemicals ranks around 12% behind Linde and Air Liquide (over 30% each), but ahead of Taiyo Nissan (6%).
While the industry leader is celebrating one record after another on the trading floor, Air Products' NYSE shares (USD 215.38; US0091581068) have lost 21% since the beginning of the year. A PB reader therefore asked for our assessment.
Like its competitors, Air Products relies on long-term contracts with purchase guarantees. The business model with gases for the steel industry, the food industry and the healthcare sector, among others, is therefore more stable and less susceptible to economic cycles, meaning that the market is likely to grow at a steady rate of 5% p.a. to an estimated USD 150 billion by 2028.
After Air Products ended FY 2022/23 (as at 30.9.) with adjusted EPS growth of 12% (Linde: +16% as at 31.12.) to USD 11.51 and forecast for 2024 an adj. EPS of USD 12.80 to 13.10 (+11% to 14%) for 2024, the Group was, however, forced to withdraw its guidance when it presented its Q1 figures on Monday (February 5). The management around CEO Seifi Ghasemi is now forecasting USD 12.20 to 12.50 (+6 to 9%) because the results in the first three months of the financial year were worse than expected.
In the first three months, higher costs, a slowdown in production in Asia (share of sales: 26%) and a generally lower demand for helium had a particularly negative impact on reported earnings per share. Although earnings per share rose by 7% to USD 2.82 (profit margin: +230 basis points to 20.7%), they fell well short of the consensus (USD 3.00) and, extrapolated to the full year, would even miss the lowered target.
However, we consider the clearly positive track record to be positive: earnings have risen by 11% p.a. over the past 10 years and were only lower in the coronavirus year 2020. At 39.2%, the EBITDA margin is also well above the level of a decade ago (25%). Air Products also slightly increased its dividend again in Q1 from USD 1.75 to USD 1.77 (yield: 0.82%). The Americans can thus look back on over 40 years of dividend increases.
Over the next three years, we expect sales growth of 7% p.a. and annual EPS growth of 9%. Although the net leverage ratio recently rose from 1.4 to 1.7x EBITDA, it still offers a buffer for further investments. Due to the recent weakness of the share price, the P/E ratio has fallen to an attractive level of 18 (10Y: 26).
As Air Products still has to improve its earnings, we will wait and see how Q2 develops.
