Air Products and Chemicals Inc.'s (APD, Financial) recent selloff is a buying opportunity for long-term investors.
Shares of the atmospheric and specialty gases giant lost close to 10% of their value on Wednesday following a disappointing fourth-quarter earnings report. The selloff continued into Thursday with Air Products shares losing another 6% by mid-day.
Air Products reported GAAP earnings of $2.19 per share, trailing analysts' consensus estimate of $2.21. Revenue came in at $2.32 billion, exceeding expectations of $2.26 billion.
Apparently, investors expected more from Air Products to justify the big run-up of its stock ahead of the earnings report.
But it could also be argued that the selloff is unjustified for several reasons.
First, the company's results have been negatively affected by the Covid-19 crisis, which reduced demand from its industrial customers like oil refiners. Management estimates that headwinds from the pandemic shaved 15 cents to 20 cents off its earnings.
Then there's the nature of the company's products, which are used by hospitals, semiconductor manufacturers and refineries, with little competition.
That makes them price inelastic, allowing Air Products to raise prices while growing revenue and profits in the long run. Over the last three years, the company's revenue grew at a rate of 5.3%, while Ebitda increased by 11% and operating margins stayed at 25.48%.
Between 2010 and 2020, Air Products has delivered an annual total return of 17.50%.
| Company | APC | LIN |
| 3-year Revenue Growth (%) | 5.4 | 12.3 |
| 3-year EBITDA Growth (%) | 11 | 7.2 |
| Current Operating Margin (%) | 25.48 | 13.21 |
| Dividend (%) | 1.73 | 1.47 |
| Average Annual Total Return 2010-2020 (%) | 17.50 | 51.08 |
Meanwhile, Air Products has a positive economic profit, which means it is creating value as it grows. Additionally, it's beating competitor Linde PLC (LIN, Financial), which has a negative economic profit. This means that Air Products is a better bet on atmospheric and specialty gases as the industry grows.
| Company | ROIC | WACC | ROIC-WACC (Economic profit) | ||
| Air Products | 11.43% | 5.81% | 5.62% | ||
| Linde | 3.16% | 4.05% | -0.89% |
There's one more reason to buy Air Products: its large presence in the hydrogen market.
During a conference call hosted by Goldman Sachs last May, Air Products Chairman, President and CEO Seifi Ghasemi said the biggest opportunity for the chemical industry is hydrogen. That market is expected to grow exponentially as governments worldwide step up in the fight against environmental pollution.
"No question about it," he said. "Hydrogen is the future, and the companies that get on top of it now will benefit 10, 15 years from now."
Air Products is the world's largest producer of outsourced hydrogen to oil refineries with an extensive pipeline supply network and world-class customer service. Hydrogen is projected to make up 80% of the company's portfolio by 2035.
Meanwhile, investors can collect the company's dividend, which currently yields 1.73%.
Disclosure: I own shares of Air Products and Linde.
Read more here:
- Target Won't Solve Ulta's Big Problem
- Looking for Profitable Investments with Return on Invested Capital
- Uber and Lyft: Good Companies, Bad Investments
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
