Air Products Earnings: Long-Term Outlook Bright, but Investors Turn Focus to Project Execution

We are maintaining our $319 fair value estimate for narrow-moat-rated Air Products AFD after the industrial gas firm reported its fiscal second-quarter earnings. We’ve made some puts and takes in our model, but a negative impact due to Air Products’ withdrawal from the Indonesia coal gasification project was offset by our slightly more optimistic near-term margin projections as well as time value of money. We view the name as modestly undervalued, with shares currently trading in 4-star territory.

Fiscal second-quarter underlying sales were up by 14% year over year, as volume grew 6% and price increased 8%. Volumes increased across all regions: 9% in the Americas, 7% in Asia, and 3% in Europe. Merchant prices were 18% higher compared with the same period last year. Air Products expanded its adjusted EBITDA margin by 140 basis points year over year, from 34.6% to 36%, thanks to higher pricing, volume leverage, and higher equity affiliates’ income. Management raised the bottom end of its outlook for full-year fiscal 2023 and now anticipates adjusted EPS in the range of $11.30-$11.50 (up from $11.20-$11.50).

Air Products’ fiscal second-quarter results included a $185.6 million noncash charge related to the firm’s withdrawal from two projects in Indonesia and Ukraine. New project announcements during the quarter included two large-scale carbon monoxide projects in Texas and four liquefied natural gas process technology and equipment agreements. We remain optimistic about Air Products’ long-term growth prospects, as we continue to expect the industrial gas firm to capitalize on blue and green hydrogen opportunities. Nonetheless, as the firm’s large projects near completion, we expect the market’s focus to shift from new project announcements to project execution, including timing and cost management.