/ Equity Research / APD | Page 1

Air Products and Chemicals Inc.

/ (APD-NYSE)
We are upgrading our rating on Air Products to Neutral following its better-than-expected first-quarter fiscal 2013 results. Revenues and adjusted earnings beat the Zacks Consensus Estimates.Sales were boosted by Indura and DA NanoMaterials acquisitions. Management raised its earnings guidance for fiscal 2013factoring in the positive impact of share buybacks. Air Products benefits from a diverse customer base, sustained pricing power and cost-reduction measures. While new business deals and strategic investments are expected to support results in fiscal 2013, volume in the core Merchant Gases segment is expected remain under pressure and the electronics business may continue to see weak demand. Higher energy costs also pose a threat to margin expansion.
/ Equity Research / APD | Page 1
Current Recommendation / NEUTRAL
Prior Recommendation / Underperform
Date of Last Change / 02/12/2013
Current Price (02/11/13) / $88.42
Target Price / $93.00

SUMMARY

/ Equity Research / APD | Page 1

SUMMARY DATA

52-Week High / $92.68
52-Week Low / $76.88
One-Year Return (%) / 0.70
Beta / 1.17
Average Daily Volume (sh) / 878,488
Shares Outstanding (mil) / 213
Market Capitalization ($mil) / $18,833
Short Interest Ratio (days) / 4.83
Institutional Ownership (%) / 85
Insider Ownership (%) / 1
Annual Cash Dividend / $2.56
Dividend Yield (%) / 2.90
5-Yr. Historical Growth Rates
Sales (%) / 0.0
Earnings Per Share (%) / 5.6
Dividend (%) / 10.1
P/E using TTM EPS / 16.3
P/E using 2013 Estimate / 15.3
P/E using 2014 Estimate / 13.8
Zacks Rank*: Short Term
1–3 months outlook / 2 - Buy
* Definition / Disclosure on last page
Risk Level * / Low,
Type of Stock / Large-Blend
Industry / Chem-Diversifd
Zacks Industry Rank * / 97 out of 267

OVERVIEW

Headquartered in Pennsylvania, Air Products and Chemicals Inc. (APD) was founded in 1940. The company makes industrial gases as well as a variety of polymer and performance chemicals. It also supplies processing equipment. The company serves technology, energy, industrial and health care customers globally. Air Products is the world’s largest supplier of hydrogen and helium. The company has built leading positions in growth markets such as semiconductor materials, refinery hydrogen, natural gas liquefaction, and advanced coatings and adhesives. Through its subsidiaries, affiliates and minority-owned ventures, Air Products conducts business in over 40 countries besides the U.S. The company has majority or wholly-owned foreign subsidiaries in Canada, 17 European countries (including the United Kingdom and Spain), 9 Asian countries (including China, Korea, Singapore, and Taiwan), and 4 Latin American countries (including Mexico and Brazil). Air Products also owns minority interests in entities operating in Europe, Asia, Africa, the Middle East and Latin America (including Italy, Germany, China, India, Singapore, Thailand, South Africa and Mexico).

Air Products operate in four segments: Merchant Gases, Tonnage Gases, Electronics and Performance Materials and Equipment and Energy segment.

The Merchant Gases segment sells atmospheric gases such as oxygen, nitrogen and argon; process gases including hydrogen and helium; and certain medical and specialty gases for the metal, glass, chemical processing, food processing, health care, steel, general manufacturing and petroleum and natural gas industries. This segment also offers respiratory therapies, home medical equipment and infusion services primarily in Europe.

The Tonnage Gases segment provides hydrogen, carbon monoxide, nitrogen, oxygen and syngas (a gas mixture that contains varying amounts of carbon monoxide and hydrogen) principally to energy production and refining, chemical and metallurgical industries. It also produces dinitrotoluene used for the manufacture of flexible polyurethane foam.

The Electronics and Performance Materials segment offers specialty gases such as nitrogen trifluoride, silane, arsine, phosphine, white ammonia, silicon tetrafluoride, carbon tetrafluoride, hexafluoromethane, critical etch gases and tungsten hexafluoride, as well as specialty chemicals, services and equipment for the manufacture of silicon and compound semiconductors, thin film transistor liquid crystal displays and photovoltaic devices. The segment also provides performance materials primarily for coatings, inks, adhesives, civil engineering and personal care products.

The Equipment and Energy segment designs and manufactures gas-processing equipment for air separation, hydrocarbon recovery and purification, natural gas liquefaction and helium distribution. It also offers plant design, engineering, procurement and construction management services principally to chemical and petrochemical manufacturing, and oil and gas recovery and processing industries.

During 2009, Air Products sold its U.S. Healthcare business to OptionCare Enterprises Inc., a subsidiary of Walgreen Co. and Landauer-Metropolitan Inc.,for total cash proceeds of $38.1 million and to Rotech Healthcare Inc. for cash proceeds of $12.1 million.

Air Products, in April 2012, completed of its acquisition of EI DuPont de Nemours & Co.’s (DD) stake in its 50-50 joint venture with DuPont Air Products NanoMaterials LLC (DA NanoMaterials). The joint venture is engaged in manufacturing components for the semiconductor industry. The terms of the agreement were undisclosed. Based in Tempe, Arizona, with regional headquarters in Taiwan, DA NanoMaterials manufactures chemical mechanical planarization (CMP) slurries which primarily polish semiconductors and wafers used in electronic devices.The acquisition enhances Air Products' presence in the electronics market.

Air Products generated sales of $9,612 million in fiscal 2012 with Merchant Gases, Tonnage Gases, Electronics and Performance Materials, and Equipment and Energy divisions accounting for 38%, 33%, 24% and 5%, respectively.

Divestiture of Homecare Business

In January 2012, Air Products reached agreements with The Linde Group, under which, the latter agreed to purchase its Homecare business in Belgium, Germany, France, Portugal and Spain. The business represents approximately 80% of the total Homecare business revenues.The transaction was closed on April 30, 2012. Total sales proceeds of approximately $777 million were received in cash at closing. The Homecare business is now accounted as discontinued operations.Air Products expects to sell the remaining portion of its Homecare business, which is primarily in the UK, before the end of calendar year 2012.

REASONS TO BUY

Given its leading position in the gases business, Air Products is well positioned to capitalize on the cyclical recovery in its core industrial end-markets. It has sufficient capacity to meet the expected upturn in demand without incurring additional capital expenditures.

Electronic gases continue to be the primary growth driver, with a robust liquid crystal display (LCD) market being the major demand driver for electronic gases. Refinery hydrogen represents a tremendous opportunity, where refiners are required to meet lower sulfur specifications. Air Products remains focused on refinery hydrogen, which yields 30% of its revenues. Over the next 10 years, the company foresees incremental global hydrogen demand and has 7 refinery projects in the pipeline.

New business wins in the Merchant Gases segment may drive results in the near term. The acquisition of a 67% stake in Chilean industrial gas company, Indura S.A. (South America’s biggest independent industrial gas company with annual sales of $478 million) is expected to usher in substantial growth opportunity for Air Product, placing it as Latin America’s second largest industrial gas producer. The acquisition opens up a $1.5 billion opportunity in Latin America, the second-highest growth region in the world following Asia.

In Equipment and Energy, we are encouraged by the opportunities in liquefied natural gas (LNG) market. Air Products has been chosen for a major off-shore LNG project in Malaysia, representing a key milestone for its LNG technology and equipment.The company landed an equipment and process license agreement with PETRONAS Floating LNG 1 Ltd., a fully-owned unit of Malaysia’s national oil and gas company Petroliam Nasional Berhad. Under the pact, the company will supply LNG technology and equipment for the PETRONAS Floating LNG Project 1 (PFLNG 1). Roughly 1.2 million tons of LNG is expected to be produced annually from the PETRONAS LNG Project when it comes online in late 2015.The deal follows Air Products’ announcement that it has manufactured the 100th LNG heat exchanger at its Wilkes-Barre facility in Pennsylvania. The milestone unit is slated to be placed for the “Donggi-Senoro” LNG Project in Indonesia in 2014.Moreover, to address the growing demand for LNG technology and equipment, Air Products is also building a new manufacturing facility in Manatee County, Florida. The new facility, which will expand its LNG manufacturing capacity, will meet the demand for its large LNG heat exchangers.The LNG technology is gaining importance as it meets the increasing global need for cleaner energy.

Air Products is embarking on headcount reduction, keeping a tight control on SG&A expenses and undertaking work process improvement initiatives. Moreover, it remains committed to maximize returns to shareholders. The company’s Board, in March 2012, raised its quarterly dividend to $0.64 per share from $0.58, representing a 10.3% increase. Moreover, it continues to make share repurchases having bought back 5.7 million shares in the most recent quarter. The company raised its earnings guidance for fiscal 2013 factoring in the positive impact of share repurchases.

REASONS TO SELL

Sluggish economic conditions across the U.S. and Europe may continue to impact the demand for the company’s products. Volume in the Merchant Gases division is expected remain under pressure, partly due to the recessionary conditions in Europe. Electronics and Performance Materials segment is expected to witness soft demand while profits are expected to fall in the Tonnage Gases division due to lower volume and higher maintenance spending. Sluggish U.S. manufacturing growth given high unemployment, depressed customer confidence and uncertainty surrounding debt ceiling and spendingmay impinge results in fiscal 2013.

Soaring energy costs pose a risk to margin expansion. Energy (including electricity, natural gas and diesel fuel for delivery trucks) is the largest cost component in Air Products’ business. The company’s industrial gas facilities use substantial amounts of electricity, accounting for 15% of revenues. Hydrocarbons, including natural gas, are the primary feedstock for the production of hydrogen, carbon monoxide and synthesis gas. The Electronics and Performance Materials segment uses raw materials, including alcohols, ethyleneamines, cyclohexamine, acrylonitriles and glycols. In addition, transportation costs and related fuel costs account for about 5% of sales. Therefore, energy and raw material price fluctuations materially impact the company’s revenues and earnings.

Air Products had a total long-term debt of roughly $5.1 billion at the end of the most recent quarter. The company’s debt remains considerably high compared with cash and cash equivalent of roughly $546 million. Air Products expects to continue incurring debt to fund new projects and refinance maturing debt.

Air Products’ return on capital and profitability lags behind its peers. The former is due to excessive investment in industrial gases, while the latter is due to its low-margin chemicals business. In the industrial gases arena, Air Products competes with Praxair, Air Liquide and Linde AG. In the global electronic gases market, the key competitors are Air Liquide, BOC Gases and Nippon Sanso.

Air Products generates a considerable amount of revenues outside the U.S., and therefore, is exposed to foreign exchange fluctuations. Higher pension expenses and tax may also impact the bottom line moving ahead.

RECENT NEWS

Air Products Beats, Ups Guidance- January23, 2013

Air Products logged first-quarter fiscal 2013 (ended December 31, 2012) earnings from continued operations of $1.30 a share, beating the Zacks Consensus Estimate by a penny. Consolidated net income from continuing operation increased 22.6% year over year to $276.9 million

Revenues rose 10.4% year over year to $2,562.4 million, beating the Zacks Consensus Estimate of $2,471 million. Sales were aided by higher volumes in the Tonnage Gases, Equipment and Energy divisions and acquisitions.

Segmental Highlights

Revenues from the core Merchant Gases segment sales climbed 14% year over year to $1,009 million in the first quarter on the back of Indura acquisition. Sales from the Tonnage Gases division rose 11% to $898 million driven by strong new plant volumes.

Revenues from the Electronics and Performance Materials segment rose 3% year over year at $549 million, supported by the acquisition of DA NanoMaterials. The Equipment and Energy division saw healthy gains in the quarter with sales surging 19% to $106 million, boosted by an increase in large air separation unit and LNG equipment revenues.

Financial Position

Air Products exited the first quarter with cash and cash equivalents of $545.6 million, up roughly 20.1% sequentially. Long-term debt stood at $5,107.3 million as of December 31, 2012, compared with $4584.2 million as of September 30, 2012.

Outlook

For fiscal 2013, Air Products plans to take a number of steps including cost control measures, restructuring actions, price improvements and volume growth. The company expects that its recent strategic moves will position it for future growth and profitability despite the modest economic backdrop.

The company now anticipates earnings for fiscal 2013 to be in the range of $5.70 to $5.90 per share, up from its previous guidance of $5.65 and $5.85 per share. For second-quarter fiscal 2013, earnings are expected in the band of $1.34 to $1.39 per share.

Air Products 4Q Mixed, Profit Dives- October19, 2012

Air Products logged fourth-quarter fiscal 2012 (ended September 30) adjusted earnings from continued operations of $1.42 a share, missing the Zacks Consensus Estimate of $1.44.The adjusted earnings exclude one-time items including impairment charges of $127 million (post-tax) associated with the restructuring of the company’s photovoltaic business. Air Products, which supplies the photovoltaic market with gases including silane, is seeing weak demand in this market. The charges also include the cost associated with the company’s move to exit the polyurethane intermediates business.

Consolidated net income, as reported, plunged 57% year over year to $138.7 million (or $0.65 a share), pummeled by the hefty charges. The company reported a profit of $324.8 million (or $1.51 a share) a year ago.

Revenues rose 4% year over year to $2,606 million, beating the Zacks Consensus Estimate of $2,574 million. Sales were aided by higher volumes in the Tonnage Gases, Equipment and Energy and Electronics and Performance Materials divisions and acquisitions, partly offset by unfavorable currency impact. The company witnessed sluggish manufacturing activity in the quarter.

For fiscal 2012, adjusted earnings of $5.40 a share missed the Zacks Consensus Estimate of $5.42 and exceeded the year-ago adjusted earnings of $5.36 a share. Sales for the year edged down 1% year over year to $9,612 million, but beat the Zacks Consensus Estimate of $9,577 million.

Separately, Air Products announced the retirement of its senior vice president and chief financial officer Paul E. Huck effective February 28, 2013. Its Board has chosen the incumbent vice president, Scott Crocco, as his successor.

Segmental Highlights

Revenues from the core Merchant Gases segment sales climbed 8% year over year to $1,017 million in the fourth quarter on the back of Indura acquisition, partly marred by currency headwinds. Sales from the Tonnage Gases division fell 4% to $846 million as lower energy pass-through and negative currency impact more than offset higher volume.

Revenues from the Electronics and Performance Materials segment rose 5% year over year at $617 million, supported by the acquisition of DA NanoMaterials. The Equipment and Energy division saw solid growth in the quarter with sales surging 32% to $126 million, boosted by an increase in large air separation unit revenues.

Financial Position

Air Products exited fiscal 2012 with cash and cash equivalents of $454.4 million, up roughly 8% year over year. Long-term debt increased 16% year over year to $4,658.5 million.

Outlook

For fiscal 2013, Air Products plans to take a number of steps including execution of its new Tonnage investments and sustained improvement in its Electronics and Performance Materials unit to attain better productivity. The company expects that its recent strategic moves will position it for future growth and profitability despite the weak macroeconomic backdrop.

The company anticipates earnings for fiscal 2013 to be in the range of $5.65 and $5.85 per share. For first-quarter fiscal 2013, earnings are expected in the band of $1.26 to $1.31 per share. Air Products expects capital expenditure of between $2 billion and $2.2 billion for fiscal 2013.

VALUATION

Air Products’ current trailing 12-month earnings multiple is 16.3X, compared to the 15.6X average for the peer group and 15.5X for the S&P 500. Over the last five years, the company’s shares have traded in a range of 9.6X to 21.6X trailing 12-month earnings. The stock is trading at a premium to the peer group, based on the estimated earnings for fiscal 2013. Our Neutral recommendation on the stock indicates that it will perform in line with the broader market. Our price target of $93 is based on 16.1x our fiscal 2013earnings estimate.

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