Air Products (APD, Financial) continues to deliver for its shareholders. Fiscal year Q2 results showed continued operating progress with underlying revenue growth of 7% and earnings per share growth of 4%. Revenue growth was driven by 7% volume and flat pricing. Excluding energy pass-through and mix factors, underlying EBITDA margins declined 40 basis points as productivity gains were offset by higher costs from maintenance outages of facilities in the U.S., delayed recovery of energy prices in Europe in the merchant market, and the ramp of lower-margin tonnage contracts in Asia.
Management stated that it was “disappointed that our underlying productivity did not fully translate to the bottom line” and that “there is more to come in productivity.” These comments are consistent with our view that Air Products continues to have potential for further operating productivity and margin expansion.
Air Products’ fiscal year ending September 2017 guidance calls for earnings per share of $6.00 to $6.25, or 6% to 11% growth over the prior year. This earnings guidance excludes the benefit from the investment of the company’s significant excess capital. While management has been cautious on the economy, APD’s business has historically closely tracked industrial production. U.S. industrial production has been negative in recent years, but has now turned positive since the election for the first time in the last 18 months.
We believe the biggest driver of APD’s earnings growth over the coming years will be the company’s deployment of its excess capital. The company has $2.5 billion of excess cash and an additional $2.5 billion of debt capacity and will generate additional excess capital of $1 billion per year after paying dividends for a total of $8 billion of capital available for investment over the next three years.
CEO Seifi Ghasemi has stated that we “remain confident, and I'd like to stress the word confident, that we can deploy the $8 billion into high-return, value-creating investments in our core industrial gases business.” Seifi has a great track record of allocating capital for shareholders. We believe that Seifi and his team are being patient in their deployment of shareholder capital in pursuit of opportunities to invest in high-return acquisitions and projects. Absent sufficient attractive opportunities to deploy capital, we would expect Air Products to return capital to shareholders.
From Bill Ackman (Trades, Portfolio)'s first quarter 2017 shareholder letter.
