During the last quarter of 2013, four gurus chose Air Products & Chemicals (NYSE:APD) for a new investment. Paul Tudor Jones (Trades, Portfolio) and Jeremy Grantham (Trades, Portfolio) were the smaller investors with 6,799 and 10,700 shares respectively, when compared to Renaissance Technologies and Eric Mindich (Trades, Portfolio)’s purchase of 149,600 and 686,031 each. The largest shareholder remains Bill Ackman (Trades, Portfolio) with 20,545,284 shares, a position reached through the second half of 2013. On the other hand, Steven Cohen (Trades, Portfolio) and Whitney Tilson (Trades, Portfolio) are the two gurus which sold part of their stake in the firm at the end of the same year. In all, total stock purchases by gurus exceeded total sales throughout 2013 confirming the company’s good moment. Let us see whether the momentum will sustain it to be worth a long-term investment.
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- APD 15-Year Financial Data
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Reporting and Expanding
At the end of January, Air Products & Chemicals reported first quarter results for 2014 with strong performance in the Electronics and Performance Materials, and Equipment and Energy segments. The remaining two segments in which the company is active, Merchant Gases and Tonnage Gases, saw mixed results with a negative overall. The first experienced an increase in sales volume offset by weaker packaged gases demand in Europe and lower helium volumes due to global supply constraints. The second total sales declined by 10% due to plant outages and lower Latin America volumes.
The mixed results prompted John McGlade, chairman, president and CEO, to say, “We still see greater momentum in the second half of the year.” The momentum is backed by a target price increment taken from $104 to $125 by Jefferies Group. This is by no means a small change, since it represents a 20% increment of the original value. Citigroup Inc. accompanied the mood with an 11% percent increment, taking the target price to $133 per share. While Jefferies maintained the “Hold” rating, Citigroup upgraded it to “Buy.” Zacks posted a more conservative figure for target price at $109, while upgrading its ratings to “Neutral.”
Overall, Air Products & Chemicals’ performance has improved and analysts have reflected it on their reports. More substantial evidence can be found in the company’s recent activities in Asia. In the first region, the company announced to have been awarded a major contract by Samsung Electronics Co. Ltd. to supply complete bulk specialty gas and chemical delivery systems in support and to signed contracts with more than 20 recycled copper manufacturers to provide its oxy-fuel solution in China. And to have entered into a partnership with SmartFuel to developed Japan’s hydrogen fueling infrastructure market.
The good thing about the weak performance on two segments by Air Products & Chemicals is the cyclicality of the market. Hence, a recovery is expected in the following quarter. Another good remark hidden behind the figures is the company’s built backlog that will allow it to serve the upturn in demand. That characteristic is expected to positively impact earnings and cash flow.
Challenges are expected to continue threatening Air Products & Chemicals’ performance. In the U.S., higher taxes from the fiscal cliff and the impact of sequestration is affecting growth. In Europe, the economy continues to struggle amid austerity measures and high unemployment. Additionally, soaring energy costs worldwide pose a risk to margin expansion. Last, the company is at a comparative market disadvantageous position due to low return on capital and profitability.
Trading at 25.4 times its trailing earnings, Air Products & Chemicals’ stock carries a 53% premium to the industry average. Most notably, debt has risen considerably during the last three years while free cash declined rapidly in the same period. Hence, the small purchases by gurus are a short-term investment intended to profit from cyclicality. And no investor should consider the stock as a long-term investment at this point.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.