APD Beats Consensus, Outlook Raised - Analyst Blog

Air Products and Chemicals Inc. (APD) reported excellent first quarter 2011 results. Net income was $275.9 million or $1.25 per share versus $256.8 million, or $1.19 per share in the year-ago period.

Reported net income was $296 million or $1.35 a share versus last year's $252 million or $1.16 per share. Results were a penny above the Zacks Consensus Estimate of $1.34 per share. Solid earnings growth was the result of higher revenues.

First quarter revenues leaped 10% year over year to about $2.4 million on higher volumes across all business segments due to new contract wins. Results were above the Zacks Consensus Estimate of $2.34 billion. Cost of sales increased 9.7% year over year to $1.7 billion. Operating income increased 4.5% to $360.6 million, leading to operating margins of 20.9% in the first quarter.

Segment Performance

Merchant Gas sales improved 6% year over year to $988 million on strong volumes in the Asian markets, which witnessed its highest increase in sales and volumes in the recent past. Higher revenues translated into operating income of $201 million, which reflected a 6% increase from the prior year.

In the Tonnage Gas segment, revenues soared 10% to $766 million. Rebounding chemical and steel production and new plants going on stream led to a robust revenue growth. This coupled with higher energy and raw material cost pass-through, by way of increasing selling prices, led to an increase of 15% in operating income to $116 million. Operating margins came in at 15.1%.

Electronics and Performance Materials sales of $526 million were up 21% on higher volumes and flat pricing. Electronic sales improved 30% year over year. Volumes in the performance material business improved 11% year over year. Higher revenues and lower costs culminated to an operating income of $69 million, up 42% year over year.

Equipment and Energy sales of $112 million were up 3% on higher volumes. Operating income of $20 million increased significantly on higher LNG activity from the prior year.

Balance Sheet

Air Products ended the quarter with cash and cash equivalents of $247.2 million. Debt totaled $3.62 billion as of December 31, 2010.

Guidance

Air Products expects to achieve double-digit earnings growth, improved return on capital and 17% operating margins in 2011. Air Products also lifted its guidance for fiscal 2011 to $5.55–$5.70 per share. Air Products expects second quarter earnings to be within $1.36 – $1.40 per share.

Zacks Recommendation

Air Products and Chemicals, an industrial gas producer, is benefiting from long-term take-or-pay contract, a consolidated industry structure, a diverse customer base and sustained pricing power. Air Products' aggressive cost cutting and productivity initiatives, combined with portfolio realignment efforts, have helped mitigate fixed cost headwinds, which is very encouraging.

Currently, Air Products is chasing rivalAirgas Inc. Earlier this month, Air Products raised its offer price for Airgas to $70.00 per share. This increases the total transaction value to $7.8 billion from the initial offer of $7 billion. Although the merger will help Air Products to venture into the North American packaged gas business, we are worried that Air Products may have to pay in excess for the acquisition.

Air Products is bogged down with high leverage. The company expects to continue incurring debt in an effort to fund new projects and refinance maturing debt. The proposed Airgas acquisition would add about $1.9 billon to Air Products debt.

Based on the above factors, we have a long-term (6 months and higher) Neutral recommendation on Air Products, which is supported by a Zacks #3 Rank (Hold).