Air Products Gets Upgrade to Buy

Seaport Global Securities attributed its move to its positive view on upcoming results, longer-term potential for margin improvement and attractive valuation.
By Claire Poole ,

Seaport Global Securities said Monday it changed its rating on Air Products and Chemicals (APD) - Get Report to buy from accumulate, attributing the move to its positive view on upcoming results, longer-term potential for margin improvement, value-creating capital deployment and attractive valuation.

The firm's price target for the stock is $165 per share. The company was trading at around $144.95 in afternoon trading on the New York Stock Exchange, up almost half a percentage point.

Analyst Michael Harrison said he continues to view the company's guidance on its third quarter earnings (ending in June) as conservative given five straight quarters of sequential margin improvement. He's also modeling some pickup in volume growth, which should improve operating leverage. "We will be interested to hear details on underlying merchant gas demand in China and whether excess merchant capacity is declining as inefficient steel mills are shuttered," he said.

Allentown, Pa.-based Air Products is one of the largest suppliers of industrial gases in the world with a focus on energy, environment and emerging markets. It has a $31.3 billion market capitalization.

As the company enters its fiscal year 2017, Harrison's said the company's projects with higher return rates should begin to contribute to its earnings stream. He added that its spin-off of its electronic materials business (which will be rebranded Versum Materials) and the sale of its performance materials unit (to Germany's Evonik Industries AG) should put $2.8 billion in capital in the hands of a "disciplined and value-oriented CEO" Seifi Ghasemi [pictured] to fund high return capital expenditures, acquisitions and share repurchases.

Harrison said he's been surprised at Air Products' underperformance compared with its competitors. The stock is up 7% year-to-date versus 9% for Praxair (PX) and 11% for the group and it's again trading at a valuation discount to Praxair -- 10.5 times Ebitda over the next 12 months versus 11.6 for Praxair, he said.

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