EUR 850.00 For Business Accounts Only

Morningstar | Air Products Raises Guidance Modestly Following Strong Fiscal 3Q Performance

Nothing in narrow-moat Air Products' quarterly results alters our fundamental, long-term view of the firm. We plan to maintain our $160 fair value estimate. For the third quarter, sales rose 6% year over year to $2.3 billion, mostly due to volume, some puts and takes between price and cost, and currency effects. Furthermore, for the third quarter, EBITDA margins rose to a high of 36.3%, nearly 10 points of improvement from three years ago and 220 basis points year over year.

Top line results were helped by performance in Asia, where sales rose 16% year over year, as well as by performance in EMEA, which rose an outstanding 24% year over year on a reported basis. That said, reported figures benefited from strong currency tailwinds, with Asia and EMEA getting 6% and 7% bumps, respectively. Even as the Americas only rose 2% on a reported basis, year-over-year volume growth was similar to Air Products’ experience in Asia, up 6% thanks to strong hydrogen demand in the U.S Gulf Coast and in part due to the firm’s new plant in Baytown, Texas, as well as underlying merchant demand.

That said, growth in the Americas was impacted by cost headwinds from maintenance and no corresponding raises in price. This has lead to flat EBIT growth. Typically pricing in the industry will mirror that of other competitors. In EMEA, the firm also benefited from strong hydrogen volumes, specifically Indian plants and European pipelines, while in Asia, new plants and the firm’s base business drove volume growth. Asia also emerged from the Lunar New Year Holiday in China, which ultimately drove volume and price increases.

As a result of this strong performance, management once again increased its guidance for the 2018 year to a range of $7.40 to $7.45, up $0.10 from guidance provided to the market last quarter.

Management gave several insights in the call today. First, the team expects EBITDA margins over the long-term to range between 33% and 36%, and it does not expect margins to deviate from this number, more or less in line with our view. From our understanding, the recent outperformance should not be expected on a normalized basis, based on incremental gains. Second, margins are better than those of competitors, even as they try to price in line with the industry. Finally, management does not expect any to see any impact to its fundamentals from tariffs, as the firm has no direct exposure to import/export tariffs.