Is Air Products & Chemicals, Inc. (APD) Bill Ackman’s Big Target?

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PERSHING SQUARESince the beginning of July, Air Products & Chemicals, Inc. (NYSE:APD) has jumped significantly, from around $91.40 per share to more than $104.10 per share. Its share price has hit its 5-year high, partly due to its recent announcement of adopting a stockholder-rights plan, which leads to the market speculation that Air Products could be an activist target of hedge fund manager Bill Ackman.

According to Ackman, his fund, Pershing Square Capital Management, would invest as much as $1 billion in a large-cap and investment-grade U.S. company. However, the company’s name remained unknown. Bill Ackman described the business as “simple, predictable, and free cash flow generative, and enjoys high barriers to entry, high customer switching costs and substantial pricing power.” It seems to me that this company has quite a wide moat and has strong cash-flow generation capability.

FedEx target rumor

Previously, some in the investment community had speculated that Ackman’s target was FedEx Corporation (NYSE:FDX). Right after the rumor, FedEx’s share price was up by 4.4% to more than $103.10 per share. At the time of writing, it was trading higher, at $104.60 per share. However, FedEx’s cash flow is not predictable like Ackman’s description. Since 2004, the company’s operating cash flow has been consistently positive but fluctuating. Its free cash flow has not become positive until fiscal 2008. In fiscal 2013, FedEx generated around $1.3 billion in free cash flow.

Looking forward, FedEx Corporation (NYSE:FDX) expects to grow its adjusted EPS by 7%-13%, with the current fuel price outlook. In the current environment, customers prefer cheaper international services, thus pushing down the average market pricing. The outlook for FedEx is not so promising. The company decided to lower capacity in both the U.S. and Asia. FedEx has a total market cap of around $33.10 billion. The market values the company at 5.6 times its trailing EBITDA (earnings before interest, taxes, depreciation and amortization). At the current price, FedEx offers investors a low dividend yield at only 0.6%. Consequently, I personally do not think Ackman targeted FedEx, as the business is not predictable and free-cash-flow generative. Moreover, the sluggish outlook for the company does not excite investors at all.

How about Air Products?

Air Products & Chemicals, Inc. (NYSE:APD) is the provider of atmospheric gases, performance materials and equipment in more than 50 countries. In the past 10 years, Air Products has generated consistent positive free cash flow, fluctuating in the range of $85 million to $595 million. In the past 12 months, its operating cash flow was $1.57 billion while the free cash flow came in at $102 million. The company employed some leverage in its operations. As of June 2013, it had $6.54 billion in equity, $419 million in cash and as much as $6.1 billion in both long- and short-term debt.

For the full year, Air Products & Chemicals, Inc. (NYSE:APD) expects its outlook to be “tempered by the modest economic growth.” However, the company would keep delivering shareholder value by focusing on cost savings and productivity improvement. The continuing operating EPS was estimated to be in the range of $5.47-$5.53 per share. Trading at $104.10 per share, Air Products is worth $21.80 billion on the market. The market values the company at as much as 11.40 times its trailing EBITDA. Income investors might like Air Products with its high dividend yield at 2.70%.

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