Air Products and Chemicals (APD, Financial) is one of the top holdings of billionaire hedge fund manager Bill Ackman (Trades, Portfolio) who holds over 20 million shares of the company. Last month, the company announced increase in product pricing and monthly service charges for merchant industrial gas customers in North America. The pricing adjustments include increases of:
- Up to 20% for liquid argon
- Up to 12% for liquid oxygen and liquid nitrogen
- Up to 10% on monthly service charges
The company is in midst of a restructuring and is trying to catch up with its peer Praxair (PX) in terms of operating margins. I believe this recent price increase is a step in the right direction to improve the company's operating performance. Here’s a look at the company’s business in detail.
Air Products and Chemicals is a industrial gas company with a portfolio of products that include atmospheric gases, process and specialty gases, performance materials, equipment, and services. Last year, the company appointed Seifollah Ghasemi as the new CEO with the aim of improving the company's operating performance and increasing its margins by reducing costs and streamlining processes. Things have started improving at the company under the new CEO's tenure and the company delivered strong last quarter results.
The company materially improved its safety record and improved its lost-time injury rate by 42%. The company increased its EBITDA margins by 240 basis points and earnings per share for the quarter increased 16% versus last year. Going forward, the company remains focused on becoming the safest and most profitable industrial gas company in the world.
Management is also focused on creating value for its shareholders, cash generation, capital allocation and moving towards a decentralized organization. In September 2014, the company laid out a detailed strategic plan to move forward. The plan included five key points:
- Focus on the core business
- Restructure the organization
- Change the company culture
- Control Capital/Costs
- Align Rewards
The company had made progress on all these fronts. The company is now focused on improving and growing its core Industrial Gases business. The management has implemented a new structure designed to create a simple empowered and accountable organization. The company is also making progress in implementing a culture of total focus on safety, simplicity and speed of execution. On the capital allocation front, the company has started examining all projects over $3 million on a weekly basis with full participation of its relevant executives. The company also has made significant changes to align reward to its compensation plans. The new plan encourages focus on EBITDA and cash generation.
In addition to turnaround gaining traction, share purchase by the company's new CEO - Seifollah Ghasemi - also makes me bullish on the company. He has purchased 115,000 shares of the company since he became the CEO with the latest purchase made on February 18. He is the person in charge of turnaround and clearly seems upbeat about the company's prospects.
Air Products is trading at 20.71 times FY2016 (Sept.) earnings estimates. The company's EPS is expected to grow 12.45% in the current year and 12.92% next year. Out of 21 analysts covering the company, six are bullish and have buy recommendations, 13 have hold ratings and two have sell ratings. I recommend a buy on the stock given the recent price increases which can help the company’s margins, restructuring actions gaining traction and reasonable valuations.
