Air Products and Chemicals (APD, Financial) recently posted its fourth-quarter results. Its cost-cutting initiatives helped the company to put impressive financial numbers on the board. It witnessed relatively higher volumes for its merchant gases, electronics and performance materials across United States, Canada, Europe and Asia. Also, higher pricing across these regions led to comprehensively a better performance for the company this quarter.
Air Products and Chemicals, for the fourth-quarter reported revenue of $2.67 billion, a rise of 3.4% as compared to $2.58 billion in the same quarter a year earlier. Also, its earnings of $1.66 per share exceeded consensus estimates of $1.61 per share for the quarter. It had earnings of $1.47 in the fourth-quarter 2013.
Looking ahead the company should benefit from its action plan. This action plan focuses on a number of key areas that should enhance its performance going forward. This includes a complete focus on its core industrial gases business, decentralization of its operations, a better dimension towards business process, speed of execution and safety measurements, improved controlling for its costs and capital expenditure and a better incentive system. Air Products expects these action plans to create substantial value for shareholders in the long-run.
Merchant gases are a potential growth driver
Air Products is seeing noteworthy growth momentum for its Merchant gases segment. It is seeing relatively higher demand for its liquid oxygen, nitrogen and argon in metals, chemicals and oilfields services market. The growing volumes for these products across many regions like the United States, Canada, Europe and Asia highlights tremendous growth potential for the company ahead. It has signed more no of contracts this year that’s should drive its top line performance. Also, the recent increase in prices for these products should accelerate its bottom line performance going forward.
However, it is seeing lower services and applications equipment sales as helium continues to confront supply limitation. Nevertheless, the increased count of contracts should help the company to offset this headwind. Also, the prices for Helium, LOX/LIN and LAR have recovered from severe weather impact that should strengthen its services and applications equipment sales. Merchant gases sales grew 3% along with 2% each growth in volume and pricing. In a few regions, such as the United States and Canada, it saw more than 6% sales growth and 5% pricing growth for its merchant gases.
In addition, the company is observing significant double-digit volume growth in its electronics and performance materials. It is seeing great strength particularly in both Advanced & Processed materials and delivery system. The end-market demand continues to drive growth for its products as it is the market leader under this category. Also, the recent introduction of new or fresh products should assist the company to gain extra market share this quarter.
Furthermore, its advanced material segment should benefit from the increased production of next-generation nodes that its customers are producing. This enhanced production will certainly drive demand for its materials going forward. Also, its Delivery System should benefit from the on-stream new projects that the company has recently bought. It expects a rise in equipment and installation services as its key fab customers continue to accelerate production for new nodes. Its electronics and performance material segment grew 16% and 11% year-on-year basis.
Apart from these positive market trends and developments, the company should gain from its cost-saving strategic initiatives. Air Products remains upbeat on delivering improved strong cost performance that is expanding its operating margins. Its operating margins improved 200 basis points in the last reported quarter. The company expects innovation-driven growth, pricing, cost improvements and manufacturing productivity to support its growth in the future. It is effectively leveraging these capabilities under this improved market conditions, which will undeniably boost its top as well as bottom line performance going forward.
Conclusion
Air Products and Chemicals looks like a great investment opportunity. It should benefit from its restructuring pains and improved market dynamics that should drive growth for the company going forward. The analysts expect its earnings to grow at CAGR of 10.95% for the next five years. This indicates reasonable growth for the stock in the long run. In fact, the stock carries better short-term gains as its earnings will grow at CAGR of 11.90% this year and 12.20% by next year respectively.
Moreover, the stock shares cheap valuations. It is trading at the trailing P/E of 31.82 and forward P/E of 20.21, reflecting strong growth prospects for the company in the future. Also, it looks pretty strong on profit and wealth metrics. Its profit and operating profit margins are 9.50% and 15.76% respectively, while its ROE stands at 12.85% for the trailing twelve months. Its balance sheet carries total cash of $360.30 million and has total debt of $6.14 billion. It has total operating cash flow of $2.19 billion.
