APD Stock Study (4-29-24)

I recently did a stock study on Air Products and Chemicals Inc. (APD, $236.08). The previous study is here.

M* writes:

     > Since its founding in 1940, Air Products has become one of the
     > leading industrial gas suppliers globally, with operations in
     > 50 countries and 19,000 employees. The company is the largest
     > supplier of hydrogen and helium in the world. It has a unique
     > portfolio serving customers in a number of industries, including
     > chemicals, energy, healthcare, metals, and electronics.

This large-size company has grown sales and earnings at annualized rates of 2.5% and 8.9% over the last 10 years, respectively. Lines are somewhat up and parallel. Sales has a long flat time (from ’14-’21) while EPS dips in ’17 (TCJA?).

Over the last decade, PTPM leads peer and industry averages while trending higher from 13.0% (’14) to 22.9% (’23) with a last-5-year mean of 24.4%. ROE slightly lags peer and industry averages despite increasing from 12.7% (’14) to 16.2% (’23) with a last-5-year mean of 15.9%. Debt-to-Capital is less than peer and industry averages while ranging from 23.1% in ’19 to 46.8% in ’16 with a last-5-year mean of 36.8%.

Quick Ratio is 1.5 and Interest Coverage is 16.4. Value Line gives an “A++” for Financial Strength. M* gives a Capital Allocation rating of “Exemplary” and has recently upgraded the company to “Wide” for Economic Moat.

With regard to sales growth:

• YF projects YOY 0.2% and 7.4% for ’24 and ’25, respectively (based on 21 analysts).
• Zacks projects YOY 0.7% and 7.8% for ’24 and ’25, respectively (6 analysts).
• Value Line projects 6.5% annualized growth from ’23-’28.
• CFRA projects 1.8% YOY and 5.4% per year for ’24 and ’23-’25.
• M* gives a 2-year annualized ACE of 4.6%.

I am forecasting toward the lower end of the range at 3.0% per year.

With regard to EPS growth:

• MarketWatch projects 11.2% and 9.2% per year for ’23-’25 and ’23-’26, respectively (based on 25 analysts).
• Nasdaq.com projects 8.9% YOY and per year for ’25 and ’24-’26, respectively (8, 8, and 5 analysts for ’24, ’25, and ’26).
• Seeking Alpha projects 5-year annualized growth of 10.6%.
• YF projects YOY 7.0% and 9.1% for ’23 and ’24, respectively (23), along with 5-year annualized growth of 6.7%.
• Zacks projects YOY 7.6% and 8.9% for ’24 and ’25, respectively (8), along with 5-year annualized growth of 7.3%.
• Value Line projects 8.1% annualized growth from ’23-’28.
• CFRA projects 8.6% YOY and 9.7% per year for ’24 and ’23-’25 along with 3-year annualized growth of 12.0%.
• M* projects long-term annualized growth of 13.6%.

My 6.0% per year forecast is below the range of five long-term estimates (mean 9.3%). My initial value will be ’23 EPS of $10.30/share rather than 2024 Q1 EPS of $10.45 (annualized).

My Forecast High P/E is 24.0. Over the last 10 years, high P/E generally trends higher from 27.7 (’14) to 31.9 (’23) with a last-5-year mean of 33.0 and a last-5-year-mean average P/E of 27.3. I am projecting near the bottom of the range (21.0 in ’16).

My Forecast Low P/E is 18.0. Over the last 10 years, low P/E ranges from 15.3 in ’16 to 26.9 in ’21 with a last-5-year mean of 21.7. I am forecasting near the bottom of the range (only ’16 is less).

My Low Stock Price Forecast (LSPF) is the default value of $185.40 based on $10.30 initial value. This is 21.5% below the previous closing price and 12.6% less than the 52-week low.

Over the last decade, Payout Ratio ranges from 48.8% (’16) to 71.9% (’17) with a last-5-year mean of 62%. I am forecasting below the range at 48.0%.

These inputs land APD in the HOLD zone with a U/D ratio of 1.9. Total Annualized Return (TAR) is 9.0%.

PAR (using Forecast Average—not High—P/E) of 6.4% is less than I seek for a large company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I start by comparing my inputs with those of Member Sentiment (MS). Based on 115 studies (my study and 47 outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 6.4%, 8.9%, 28.0, 21.1, and 62.2%, respectively. I am lower across the board. Value Line’s projected average annual P/E of 23.5 is lower than MS (24.6) and higher than mine (21.0).

MS high / low EPS are $16.07 / $10.40 versus my $13.78 / $10.30 (per share). My high EPS range is lower due to a lower growth rate. Value Line’s high EPS is greater than both at $17.00.

MS LSPF of $208.30 implies a Forecast Low P/E of 20.0: lower than the above-stated 21.1. MS LSPF is 5.1% less than the default $6.28/share * 10.3 = $219.44 resulting in more conservative zoning. MS LSPF is 12.4% greater than mine, however.

TAR (over 15.0% preferred) is much lower than MS 16.1%. MOS is robust in the current study.

With regard to valuation, PEG is 2.6 and 3.6 per Zacks and my projected P/E, respectively: both significantly overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] is a bit cheap at 0.83.

APD is a BUY under $221. With a forecast high price ~$330, my TAR criterion won’t be met until ~$165/share. With other compelling things about the company and stock, I probably would not wait that long.