Saturday, July 23, 2011

STRONG BUY !!! Air Products & Chemicals Inc. (APD)

Air Products & Chemicals Inc. (NYSE:APD) reported third quarter fiscal 2011 EPS of $1.46, versus $1.17 in the year-earlier quarter and matched the Zacks Consensus Estimate of $1.46.
The results exclude a 4-cent gain in discontinued operations recognizing a tax benefit from the sale of the company’s U.S. healthcare operations in 2009.
Net sales amounted to $2.6 billion, versus $2.3 billion in the prior-year quarter, moving ahead of the Zacks Consensus Estimate of $2.5 billion. The improved results were mainly driven by higher volumes in the Electronics and Performance Materials and Tonnage Gases segments.
The company witnessed strong volume growth across a number of businesses mainly in the Asia Merchant business and the energy and electronics markets. However, U.S. and Europe Merchant businesses saw slower growth.
Costs and Margins
Cost of sales increased to $1.9 billion in the quarter from $1.6 billion in the year-earlier quarter. Selling and administrative expenses also increased to $252.9 million from $241.2 million in the prior-year quarter.
The company reported an operating profit of $416.8 million, increasing from $336.4 million in the year-ago quarter, thereby increasing the operating margin by 123 basis points year over year to 16.2% in the reported quarter.
Segmental Performance
Merchant Gases: Sales of the segment increased 12% to $1,027.2 million from $915 million in the year-ago-quarter. Operating income of the segment increased to $182 million from $176.4 million in the prior-year quarter, mainly due to increased volumes that were offset by higher operating and maintainence costs and pricing pressure in Europe.
Tonnage Gases: Sales of the segment rose 20% to $868.7 million from $724.5 million in the year-ago quarter mainly because of higher volumes, and higher energy and raw material cost pass-through.
Operating income amounted to $114.8 million, down from $119.8 million in the year-earlier quarter due to higher maintenance costs primarily from customer scheduled outages which offset the volume gains. There were a significant number of planned customer maintenance outages in the segment.
Electronics and Performance Materials: This segment reported sales of $602.4 million, up 21% from $496.9 million in the year-ago quarter, led by strong volumes and solid cost performance. Operating income increased by a whopping 74.7% to $109 million from $62.4 million in the year-earlier quarter. This quarter’s results represented record sales, profits and margins for the segment.
Equipment and Energy: Sales declined 31% to $79.5 million from $115.9 million in the prior-year quarter. The poor performance is due to the lower sale of air separation units. Operating income decreased substantially to $8.6 million from $21.1 million in the year-ago quarter, due to lower sales and a prior year gain on an asset sale.

Financial Position

Cash and cash equivalents were $430.1 million as of June 30, 2011, up from $374.3 million as of September 30, 2010.
Long-term debt of the company increased to $4,054.3 million as of June 30, 2011 from $3,659.8 million as of September 30, 2011.
For the quarter ahead, the company forecasts strong revenue growth in the Tonnage, and Electronics and Performance Materials segments. The company also expects to improve margins in the next quarter based on the actions it is undertaking to improve Merchant segment performance.
Management expects fourth quarter EPS between $1.48 and $1.53 per share. The company raised the full fiscal year EPS guidance between $5.70 and $5.75 per share from $5.65 and $5.75 previously.
Last month the company also announced new financial targets for the 2015 timeframe. The company expects to deliver top line growth of 11% to 13% per year over the next four years, which would take its total revenues to over $15 billion in 2015. Air Products also expects to improve its operating margin to 20% and its return on capital to 15% by 2015.
Airgas Update
In February 2010, the company had made a tender offer to acquire all the outstanding common stock of Airgas Inc. (NYSE:ARG), including the associated preferred stock purchase rights, for $60.00 per share in cash.
Airgas, a Delaware company, is the largest U.S. distributor of industrial, medical, and specialty gases, and hard goods. However, a year later Air Products terminated the offer. For the nine months ended 30 June 2011, a net loss of $48.5 ($31.6 after-tax, or $.14 per share) was recognized related to this transaction.

Based in Pennsylvania, Air Products benefits from a long-term take-or-pay contract, a consolidated industry structure, a diverse customer base and sustained pricing power. However, soaring energy and raw material costs pose a threat to margin expansion.
In order to compensate for escalating raw material costs, Air Products has been increasing the price for a range of chemicals it makes for industrial use. Air Products faces stiff competition from Praxair Inc. (NYSE:PX) and The Linde Group

Analysts' Targets
 Deutsche Bank Securities$110 
    Friday, February 18, 2011

Consensus Rating Details
Current Average Recommendation1.31
Previous Average Recommendation1.29
Change in Average Recommendation0.02
Number of Analysts Reporting16 
Strong Buy
Current: 1.31
Previous: 1.29
Change: 0.02
Strong Sell