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Air Products' Cost Containment Efforts Remain in Place

Zacks Equity Research

On Aug 7, we issued an updated research report on industrial gas giant Air Products (APD). While the company is benefiting from its cost reduction actions, new business deals and strategic investments, it remains exposed to high energy costs and challenges in its tonnage gases business.

Air Products’ earnings for third-quarter fiscal 2014 (ended Jun 30, 2014), reported on Jul 23, beat the Zacks Consensus Estimate while sales missed the same. Sales rose as a decline in the Tonnage Gases division was more than offset by gains in other businesses. The company tightened its earnings guidance for the full year.

Air Products, a Zacks Rank #3 (Hold) stock, benefits from a diverse customer base, cost-reduction measures and sustained pricing power. New business deals and strategic investments are expected to support results in fiscal 2014. Moreover, the acquisition of a 67% stake in Chilean industrial gas company, Indura S.A., has ushered in substantial growth opportunity for Air Products.

Air Products is also keeping a tight control on expenses and undertaking work process improvement initiatives. The company remains on track in delivering on its cost reduction programs (announced in 2012 and 2013), which should support its margins this year.

We are also encouraged by incremental opportunities in the liquefied natural gas (LNG) space. Air Products has been chosen for a major off-shore LNG project in Malaysia, representing a significant opportunity for its LNG technology and equipment. The LNG technology is gaining importance as it meets the increasing global need for cleaner energy.

However, Air Products’ tonnage gases business continues to face challenges. Lower polyurethane intermediates (PUI) volumes and maintenance spending may impact profit in this division. Moreover, helium volumes remain weak due to feedstock supply constraints and weak packaged gases demand in Europe.

High energy costs also pose a threat to margin expansion. In addition, shutdown of the polyurethane intermediates (PUI) business is expected to have an earnings headwind of 10 cents per share in fiscal 2014.

Other Stocks to Consider

Other chemical stocks worth considering include Celanese Corporation (CE), LyondellBasell Industries NV (LYB) and Johnson Matthey plc (JMPLY). All of them carry a Zacks Rank #2 (Buy).

Read the Full Research Report on APD
Read the Full Research Report on CE
Read the Full Research Report on LYB
Read the Full Research Report on JMPLY

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