Billionaire Bill Ackman’s Next Trick: Air Products & Chemicals, Inc. (APD)

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Airgas, Inc. (NYSE:ARG) is likely the closest peer for Air Products & Chemicals, Inc. (NYSE:APD). At trailing and forward P/Es of 23 and 17, respectively, Airgas is priced about even with its larger peer (the stock’s market cap is $7.5 billion) on those terms. It has also reported its results for the quarter ending in June, which in this case is the company’s Q1. Sales and operating income were up slightly but this was offset with higher interest expenses, and so diluted earnings per share were down only a penny compared to the first quarter of the last fiscal year to $1.14.

Airgas, like Air Products & Chemicals, Inc. (NYSE:APD), focuses on manufacturing industrial gases such as nitrogen and oxygen to customers in areas such as manufacturing, medicine, and petrochemicals. It’s apparent that Wall Street analysts expect these two companies to increase their earnings over the next year or so, judging from the lower forward multiple. However, investors probably should not be as optimistic at this point considering the flatter results in recent quarters.

Air Products & Chemicals can also be compared to Praxair, Inc. (NYSE:PX), which provides industrial gases as well as performance coatings. Praxair recorded a modest increase in net income in its most recent quarter compared to the same period in the previous fiscal year, off of a 7% increase in revenue. The stock trades in line with the other two companies discussed here- for example, the trailing P/E is 22. As such markets are pricing in higher earnings growth here as well, and so absent any significant catalysts it does not look like a good value either.

All of this is to say that Air Products & Chemicals, along with the rest of its industry, already has a bit of improvement on the earnings front priced in- and with revenue growth generally low, markets had probably been expecting operations to improve somewhat at these companies. While investors shouldn’t rule out the possibility of Pershing Square being successful here, it does not look like a good pick to follow until Ackman provides specific, credible cost cutting plans and probably not until those plans actually show signs of working.

Disclosure: I own no shares of any stocks mentioned in this article.

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