Air Products & Chemicals, Inc. (APD): Should You Follow Bill Ackman Into This Materials Giant?

Page 1 of 2

Bill Ackman needs a winner. This is the conclusion most investors likely came to upon receiving news that the famed hedge fund manager’s Pershing Square Capital Management invested $2.2 billion in materials company Air Products & Chemicals, Inc. (NYSE:APD).

Ackman has been struggling due to the ongoing Herbalife Ltd. (NYSE:HLF) saga. In light of the fact that his short position in that stock has taken an absolute beating over the past year, it’s abundantly clear that Ackman needs a winner to repair his image. Is Air Products up to the task? And, if so, should you follow Ackman’s lead?

Air Products & Chemicals, Inc. (NYSE:APD)A dividend investor’s dream

Air Products & Chemicals, Inc. (NYSE:APD) is beloved by value and income investors for its steady profit growth and reliable dividends. Earlier this year, Air Products raised its dividend by 11%, representing the 31st consecutive year of a dividend increase. These aren’t token increases, either: Air Products often provides regular double-digit percentage increases in its distribution, no matter how the overall economy is doing.

Air Products & Chemicals, Inc. (NYSE:APD) can manage such generous growth in its shareholder payout because of its incredibly sound operations. Air Products has performed admirably in the years since the Great Recession ensued. The company’s sales were flat in 2012 versus the prior year, but are up 22% since 2009.

Diluted earnings per common share clocked in at $5.44 in fiscal 2012, and the company has shown resilience to start 2013. Sales are up more than 8% through the first nine months of the current fiscal year.

All told, Ackman’s fund owns a 9.8% stake in Air Products & Chemicals, Inc. (NYSE:APD), making Pershing Square Capital Management the company’s biggest shareholder. He believes Air Products to be considerably undervalued.  The question for Foolish investors is whether he’s right.

Should Fools follow his lead?

When I last wrote about Air Products a little over one month ago, I advised investors to consider adding the best-in-breed materials giant to their portfolio, because of its resilient underlying operations and strong commitment to being shareholder-friendly.

In the wake of Ackman’s huge investment, Air Products & Chemicals, Inc. (NYSE:APD) has rallied considerably. As a result, Air Products is no longer the bargain I considered it to be at $95 per share.

Air Products has rallied to $110 per share on the Pershing Square news. The company expects $5.50 per share in fiscal 2013 earnings, which would represent only modest growth year over year. At its current price, investors are paying 20 times both trailing and forward earnings.

Because of this, Air Products & Chemicals, Inc. (NYSE:APD) now trades in-line with its closest industry peers, Airgas, Inc. (NYSE:ARG) and Praxair, Inc. (NYSE:PX).

Page 1 of 2