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Morningstar | Air Products Reports Strong 4Q Earnings but Issues Below-Consensus Guidance; We Maintain Our FVE

Narrow-moat Air Products is turning to growth after completing a productive round of cost-cutting and divestments, steps that have meaningfully improved margins and returns on capital in its core industrial gas business, which supplies oxygen, nitrogen, argon, and hydrogen to customers in energy, industrial, healthcare, and consumer end markets.Although industrial gas often represents a small portion of a customer's overall cost structure, a reliable gas supply and related services are vital to many industrial processes. As a result, major customers sign long-term supply contracts (10-20 years) that permit industrial gas suppliers to index selling prices to fluctuations in their main input costs (electricity and natural gas).Among the global majors, we consider Air Products to be technically highly competent and also a more aggressive competitor. Its $1.5 billion project backlog includes several large-scale air separation units in the United States, Saudi Arabia, South Korea, and China, as well as refinery-based hydrogen plants in the U.S. and China.Air Products is the world's largest supplier of hydrogen to refineries. Its 35%-40% market share is roughly twice as large as its nearest competitor. It operates the world's largest hydrogen pipeline along the U.S. Gulf Coast and operates the only hydrogen pipeline serving the Canadian oil sands region.In petroleum refining, hydrogen is critical in upgrading heavy crude oils and reducing sulfur content. Air Products expects the hydrogen market to continue growing over the next decade due to expected changes in the crude slate and as environmental standards dictate lower sulfur content in refined products.Despite its considerable strengths, Air Products has until recently had a history of uneven financial performance. Over the past three years, the company has divested all nonindustrial gases units and implemented a lengthy series of cost-reduction programs and write-downs.CEO and chairman Seifi Ghasemi's goal is for Air Products to become the "safest and most profitable" industrial gas company. His broad-based efforts have largely eliminated the historical performance gap with industry leader Praxair.