EUR 850.00 For Business Accounts Only

Morningstar | APD Updated Forecasts and Estimates from 25 Jan 2019

Air Products benefits from operating in an industry with a very favorable structure. Despite selling industrial gases, which are essentially commodities, public industrial gas companies have consistently delivered lucrative returns because of their economic moats. Industrial gases typically account for a relatively small fraction of customers’ costs but are a vital input to ensure uninterrupted production. As such, customers are often willing to pay a premium and sign long-term contracts to ensure their businesses run smoothly. Long-term contracts and high switching costs contribute to industrial gas producers’ moats, helping them generate a predictable cash flow stream and lucrative returns.Demand for industrial gases is strongly correlated to industrial production, increasing roughly 1.2-1.4 times global industrial production growth. As such, organic revenue growth will largely depend on global economic conditions. That said, we think Air Products can fuel additional revenue growth through mergers and acquisitions, asset buybacks, and new projects, especially in emerging markets such as China and India.Since Seifi Ghasemi was appointed CEO in 2014, new management has launched several initiatives that drastically improved Air Products’ profitability, raising EBITDA margins by over 1,000 basis points. This remarkable improvement is largely due to significant cost cuts, divestments of low-margin noncore operations, and an aggressive pursuit of opportunities in emerging markets.Air Products is poised for rapid growth over the next few years due to its roughly $15.8 billion capital allocation plan. Management has a large amount of dry powder at its disposal as a result of cash proceeds from the Versum and Evonik divestments. The company has already spent $1.8 billion and committed another $6.3 billion, investing primarily in large gasification projects in emerging markets. Additionally, management is confident it will be able to invest roughly another $6 billion over the next five years via generating cash and raising additional debt. We think that management’s plan is attainable and should fuel tremendous growth through 2022.