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Air Products: Conservative Industrial Gas Supplier with $2 Billion Share Repurchase

September 21, 2011 | About:
Air Products & Chemicals (APD) has recently announced its completion of the $1 billion share repurchase program with this quarter of $299 million. And APD announced that its board authorized a new repurchase program with an equivalent value of $1 billion.

Air Products, founded in 1940, is the one of the leading suppliers of atmospheric gases, process and specialty gases, performance materials, equipment and services to global customers in different fields such as technology, energy, industrial and healthcare. It is the world’s largest supplier of hydrogen and helium in the market of semiconductor materials, refinery hydrogen, natural gas liquefaction and advanced coatings and adhesives. It has four main business segments: Merchant Gases; Tonnage Gases; Electronics and Performance Materials; and Equipment and Energy. The Merchant Gas contributed the highest revenue as well as operating income for the company; next is Tonnage Gases, and Electronics and Performance Materials.

APD does not have customer concentration, and no single customer accounts for more than 10% of the company’s revenue. With each of industries the company serves, it has several large-volume customers with long-term contracts. Major customers would be willing to sign long-term contracts (15-20 years) to have stable supply of industrial gas. APD is the leading supplier of hydrogen globally, with 40% of worldwide hydrogen capacity – twice the amount of its nearest competitor. The industrial gas industry has consolidated and the top four players controlling 80% of the total market and APD takes the half of that.

Over the last 10 years, APD has got the outstanding operating performance for its business, and it has translated in the gains in share price as well as the constant increasing dividend payment for the stockholders. Anyone long-term investor would love to see a historical stock chart like this:

1792112389.jpg

The company kept paying dividends for more than 30 years, and the dividend has kept increasing from 25 cents a year in 1987 to nearly $2 a share in 2010, and would expect to have $2.3 a share in full year 2011.

It generated constant positive earnings with the ROE fluctuating from 10%-20%, with an average of 16% for the previous 10 years. The net margin, the operating margin and the net margin dis not fluctuate as wildly over the years, with the average of 27%, 13% and 9% respectively. The long-term agreement has helped APD to secure the operating margins in this stable way.

As the business is involved with supplier of industrial gas, no doubt that it would involves a lot of initial capital outlay and required large capital expenditure to maintain the business. That is why we would expect to see the good trend of operating cash flow, but the free cash flow would be much less impressive.

USDmil 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
CFO 1,084 1,064 1,036 1,086 1,376 1,346 1,497 1,680 1,323 1,522
CAPEX -708 -628 -613 -706 -930 -1,261 -1,055 -1,085 -1,179 -1,031
FCF 376 436 423 380 446 85 442 595 144 492


On a rolling 10-year average, the CFO stayed at $1.3 billion, whereas the free cash flow is only $382 million.

For financial health, the company incurred a reasonable amount of debt compared to its operating cash flow it generated. Total liabilities/total assets ratio is at 58%, whereas 27% is the long-term debt. The EBITDA interest coverage of the company average 15 times, signals the financial strength position for APD.

With long-term contracts with provider, stable profitability ratios, a reasonable amount of debt with constant growing operating cash flow, and a growing dividend, Air Products is suitable for the conservative income investor to hold for the long run, but they should not expect fast run-ups in the price over the short run, as the current valuation of 15.3x earnings and 11x cash flow.

This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk.

About the author:

Anh Hoang
Money manager into global equities, especially with US and Vietnam markets. CFA level 3 candidate. Lecturer for Stalla - CFA course in Vietnam

Visit Anh Hoang's Website


Rating: 3.5/5 (8 votes)

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