Yesterday Air Products (NYSE: APD) released earnings that beat estimates on all fronts. As a result, the stock price jumped more than 4%. But is this stock a buy for the long term investor? The answer isn’t so cut and dry as Air Products has faced a lot of headwinds over the past few years and faces more headwinds in the coming years.
But the company has taken some steps to keep growing in the future. The question then is whether or not these moves are enough to continue to grow earnings per share and revenues each year.
Below, we will take an in depth look at Air Products to try to determine if this stock is a good investment or not.
Air Products At A Glance
Air Products is a company that sells gases and chemicals for industrial use and has been in business since 1940.
The income strategy for Air Products is one that is beneficial to investors because they set up long term sales contracts with their customers. This allows for steady revenue each year and this means that the stock price will be less volatile overall.
What Air Products Has Going For It
So what does Air Products have going in its favor? First, I will note again the long term contracts that the company has. In addition to this, they are expanding into emerging markets where they hope to make a solid footprint.
Recently they opened up a new hydrogen plant in India and an oxygen plant in China.
Next, the company has decided to reinvest $8 billion back into the company over the next 3 years. They project that this reinvestment will allow for earnings growth of 10% annually through 2020.
Finally, the company is determined to provide shareholder value through raising its dividend. Air Products has increased their dividend each year for 34 years, which when looked at on an annual basis is an 8% annual growth rate.
When it comes to earnings, Air Products beat earnings per share estimates by $0.08 at $1.76. Revenues also beat estimates, coming in at $2.2 billion, which was an increase of 13%. In the previous quarter, revenues were higher by 11%.
Issues Air Products Is Facing
For a few years Air Products was not proactive in the industry and as a result, their competitors who were hungrier for market share have taken customers away from the company.
Related to this is the sheer size of Air Products. When companies get as large as they are, it is harder to continue growing a company at a fast rate.
To try to solve both of these issues, Air Products sold off their Materials Technology business. However many analysts think this move is too little, too late.
Where Air Products Goes From Here
Air Products is now at a crossroads. They have 2 options for future growth: add shareholder value by returning capital via dividends or find new investment opportunities to help grow revenues.
As of this writing, Air Products is taking the middle road, which really isn’t a road. They are trying to find a healthy balance to do both.
In theory this sounds like a smart move, but from the businesses I’ve seen in the past who go this route, it usually doesn’t turn out well. In fact, it usually is just delaying the inevitable, which is that they should have just picked a path and put all of their focus into trying to make it work.
Because of this, I would be wary of investing in Air Products. I don’t see the stock price going much higher than it currently is and I see revenue growth slowing in the coming years.
Maybe for the short term you could pick up some shares for the dividend, but at a 2.5% yield, you could invest in other companies and not only earn a higher dividend, but also invest in companies that are going somewhere in terms of growing revenues and earnings per share.
This author has no positions in any stock mentioned and does not plan to open any positions in any stocks mentioned for at least 72 hours after publication of this article.