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Air Products & Chemicals Stock Shows Every Sign Of Being Modestly Overvalued

- By GF Value

The stock of Air Products & Chemicals (NYSE:APD, 30-year Financials) appears to be modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $283.5 per share and the market cap of $62.7 billion, Air Products & Chemicals stock appears to be modestly overvalued. GF Value for Air Products & Chemicals is shown in the chart below.


Air Products & Chemicals Stock Shows Every Sign Of Being Modestly Overvalued
Air Products & Chemicals Stock Shows Every Sign Of Being Modestly Overvalued

Because Air Products & Chemicals is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 2.3% over the past three years and is estimated to grow 4.63% annually over the next three to five years.

Link: These companies may deliever higher future returns at reduced risk.

It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Air Products & Chemicals has a cash-to-debt ratio of 0.77, which is in the middle range of the companies in Chemicals industry. The overall financial strength of Air Products & Chemicals is 6 out of 10, which indicates that the financial strength of Air Products & Chemicals is fair. This is the debt and cash of Air Products & Chemicals over the past years:

Air Products & Chemicals Stock Shows Every Sign Of Being Modestly Overvalued
Air Products & Chemicals Stock Shows Every Sign Of Being Modestly Overvalued

It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Air Products & Chemicals has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $9 billion and earnings of $8.52 a share. Its operating margin is 24.31%, which ranks better than 93% of the companies in Chemicals industry. Overall, the profitability of Air Products & Chemicals is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of Air Products & Chemicals over the past years:

Air Products & Chemicals Stock Shows Every Sign Of Being Modestly Overvalued
Air Products & Chemicals Stock Shows Every Sign Of Being Modestly Overvalued

Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Air Products & Chemicals is 2.3%, which ranks in the middle range of the companies in Chemicals industry. The 3-year average EBITDA growth rate is 15.2%, which ranks better than 73% of the companies in Chemicals industry.

Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Air Products & Chemicals's ROIC was 10.53, while its WACC came in at 5.72. The historical ROIC vs WACC comparison of Air Products & Chemicals is shown below:

Air Products & Chemicals Stock Shows Every Sign Of Being Modestly Overvalued
Air Products & Chemicals Stock Shows Every Sign Of Being Modestly Overvalued

In closing, The stock of Air Products & Chemicals (NYSE:APD, 30-year Financials) appears to be modestly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks better than 73% of the companies in Chemicals industry. To learn more about Air Products & Chemicals stock, you can check out its 30-year Financials here.

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This article first appeared on GuruFocus.

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