Specialty chemicals manufacturer Air Products and Chemicals, Inc.’s (APD) fiscal 2023 fourth-quarter earnings surpassed analysts’ estimates but missed on revenues. The company reported quarterly adjusted earnings of $3.15 per share, beating the consensus estimate of $3.11 per share. This compares to EPS of $2.89 a year earlier.

However, APD’s fourth-quarter revenue came in at $3.19 billion, lower than analysts’ expectations of $3.35 billion. The revenue compared to $3.57 billion in the same period last year. Further, the company missed the consensus revenue estimates in three of the trailing four quarters.

For the full year fiscal 2024, the company expects adjusted EPS of $12.80-$13.10, an increase of 13% at the midpoint from the prior year’s value. For the fiscal 2024 first quarter, Air Products’ adjusted EPS guidance is $2.90 to $3.05, up 13% at the midpoint over fiscal 2023 first quarter adjusted EPS.

Also, APD anticipates capital expenditures of $5 billion to $5.5 billion for the full-year 2024.

Yesterday, APD’s shares slumped more than 10% after the company released weaker-than-expected revenue for its fourth quarter of 2023. “It was a very bad quarter,” Jim Cramer said, pointing to the company’s weak forward guidance compared to competitor Linde’s (LIN) overall upbeat results last month.

However, the company continued to increase the dividend, paying out nearly $1.50 billion to its shareholders during the fiscal 2023. APD raised the quarterly dividend by 8% to $1.75 per share in January, marking the 41st consecutive year of increases. Its annual dividend of $7 translates to a yield of 2.75% at the current share price. Its four-year average dividend yield is 2.15%.

Further, the company’s dividend payouts have grown at a CAGR of 9.9% over the past three years and 10.1% over the past five years.

Shares of APD have plunged 9.4% over the past month and 13.9% over the past six months to close the last trading session at $254.46. Also, the stock has declined 17% year-to-date.

Here’s what could influence APD’s performance in the upcoming months:

Positive Developments

On November 6, APD announced that it will build, own, and operate a state-of-the-art carbon capture (CO₂) treatment facility at its existing hydrogen production plant in Rotterdam, the Netherlands.

The facility is anticipated to be on-stream in 2026, and the resulting blue hydrogen product will serve ExxonMobil’s (Esso) Rotterdam refinery and additional customers through Air Products’ hydrogen pipeline network system. It might take a while to realize gains from this blue hydrogen plant as it’s likely to be operating in 2026.

On October 30, the company announced that it would supply two main cryogenic heat exchanger (MCGE) replacements for the PETRONAS LNG Complex in Bintulu, Sarawak, Malaysia.

These replacements are part of an extension program implemented to extend the life and continue the superior performance and high reliability of the MLNG Dua LNG facility in Bintulu. This will be the second and third MCHE replacements provided by Air Products at the facility, following the original units completed almost three decades of reliable service.

Mixed Financials  

APD’s sales declined 10.6% year-over-year to $3.19 billion for the fourth quarter ended September 30, 2023. However, its non-GAAP operating income increased 5.5% from the year-ago value to $738.60 million. The company’s adjusted EBITDA came in at $1.26 billion, up 10% from the previous year’s quarter.

Furthermore, Non-GAAP net income attributable to Air Products grew 12.4% from the prior year’s quarter to $2.56 billion, and its non-GAAP EPS was $3.15, an increase of 10.5% year-over-year. Its total liabilities stood at $16.34 billion as of September 30, 2023, compared to $13.49 billion as of September 30, 2022.

Favorable Analyst Estimates

Analysts expect APD’s revenue to increase 0.5% year-over-year to $3.19 billion for the fiscal 2024 first quarter ending December 2023. The consensus earnings per share estimate of $2.98 for the ongoing quarter indicates a 13.1% rise year-over-year. Moreover, the company has topped the consensus EPS estimates in three of the trailing four quarters.

For the fiscal year ending September 2024, analysts expect APD’s revenue and EPS to increase 7.2% and 12.8% year-over-year to $13.50 billion and $12.98, respectively. The company’s revenue and EPS for fiscal year 2025 are expected to grow 9.5% and 9.3% year-over-year to $14.78 billion and $14.19, respectively.

Mixed Profitability

APD’s trailing-12-month gross profit margin of 29.90% is 5.2% higher than the industry average of 28.43%. Also, the stock’s trailing-12-month EBITDA margin and net income margin of 32.52% and 18.26% are 84.8% and 210.5% higher than the industry averages of 17.60% and 5.88%, respectively.

However, the stock’s trailing-12-month asset turnover ratio of 0.43x is 41% lower than the industry average of 0.72x.

Elevated Valuation

In terms of forward non-GAAP P/E, APD is currently trading at 19.74x, 39.3% higher than the industry average of 14.18x. Likewise, the stock’s forward EV/Sales and Price/Sales of 4.93x and 4.17x are significantly higher than the industry average of 1.43x and 1.06x, respectively.

In addition, the stock’s forward Price/Cash Flow multiple of 12.97 is 79.6% higher than the industry average of 7.22.

POWR Ratings Reflect Uncertainty

APD’s mixed fundamentals are reflected in its POWR Ratings. The stock has an overall C rating, equating to Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. The stock has a C grade for Quality, consistent with its mixed profitability.

In addition, APD has a C grade for Growth, in sync with its mixed financial performance in the last reported quarter.

Within the Chemicals industry, APD is ranked #43 out of 83 stocks.

Beyond what I have stated above, we have also given APD grades for Sentiment, Stability, Value, and Momentum. Get all APD’s POWR Ratings here.

Bottom Line  

APD’s earnings beat analysts’ expectations in the last reported quarter but missed out on revenues. Despite decent earnings and revenue growth in the upcoming quarters, the stock’s stretched valuation is concerning. APD’s stock is currently trading below its 50-day and 200-day moving averages of $287.83 and $287.70, respectively, indicating a downtrend.

Given its mixed financials, mixed profitability, stretched valuation, and bleak near-term prospects, it could be wise to hold APD and wait for a better entry point in the stock.

Stocks to Consider Instead of Air Products and Chemicals, Inc. (APD)

Given its uncertain short-term prospects, the odds of APD outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three A-rated (Strong Buy) stocks from the Chemicals industry instead:

Mitsubishi Chemical Holdings Corporation (MTLHY)

Kuraray Co., Ltd. (KURRY)

ChromaDex Corporation (CDXC)

To explore more A and B-rated chemical stocks, click here.

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APD shares were trading at $256.05 per share on Wednesday morning, up $1.59 (+0.62%). Year-to-date, APD has declined -15.40%, versus a 15.66% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More...

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