U.S. manufacturing stock has no peers in Canada

Air Products and Chemicals’ shares aren’t particularly cheap. Even so, this U.S. manufacturing stock is a buy for long-term share price gains, decent and growing dividends and to further diversify your portfolio. It has no peers in Canada.

Pennsylvania-based Air Products and Chemicals (NYSE—APD), or APD, is one of our U.S. all-star stocks. While it’s not particularly cheap, it’s a buy for long-term share price gains. The company is also a ‘dividend aristocrat’ that has raised its dividend for 34 years in a row. It yields a decent 2.6 per cent. The consensus recommendation of eight analysts is ‘Buy’.

APD writes that its “core industrial gases business provides atmospheric and process gases and related equipment to manufacturing markets, including refining and petrochemical, metals, electronics, and food and beverage. Air Products is also the world’s leading supplier of liquefied natural gas process technology and equipment. The company’s Performance Materials Division serves the polyurethanes, cleaning and coatings, and adhesives markets.” APD has no peers in Canada and can further diversify your portfolio.

Its adjusted earnings per share keep rising

In the year to September 30, APD earned an adjusted $7.55 a share. This was up by 14.3 per cent from an adjusted $6.60 a share, the year before. The adjusted results exclude one-time items. APD writes that: “Management does not believe these items to be representative of underlying business performance.”

APD chairman, president and chief executive officer Seifi Ghasemi said the company “delivered again, with our ninth consecutive quarter of double-digit adjusted earnings growth and improved [profit] margins across our segments”.

This performance was even better than it seems. For one thing, the number of APD shares outstanding rose by one million, to 218.3 million. That is, there were no share buybacks, which automatically increase the reported earnings per share.

For another thing, APD overcame unfavourable currency changes of 16 cents a share. It operates in 50 countries. As a result, the high U.S. dollar has shrunk the value of sales and earnings abroad.

Spin-offs will further strengthen APD

On October 1, APD spun off its Electronic Material Division. This business now trades as Versum Materials on the New York Stock Exchange. APD is also selling its Performance Materials Division to Evonik Industries. Mr. Ghasemi calls these “strategic moves that will give Air Products an even stronger foundation”.

These dispositions will reduce APD’s adjusted earnings by $1.02 a share. This means that it earned $6.53 a share on a comparable basis. In fiscal 2017 (which began October 1), the company expects to earn an adjusted $7.10 to $7.35 a share. Our estimate is $7.35 a share. This would represent earnings per share growth of 12.6 per cent.

And APD continues to grow

APD recently won projects in both the United States and South Korea. The company writes that it’s making progress on the Korean-led Saudi Aramco Jazan project. Value Line’s chief economist Harvey Katz writes: “Air Products should continue to fashion solid earnings growth to the turn of the decade.”

APD plans to make capital investments of $1.2 billion this year. It can easily afford this, given its safe and low net debt-to-cash-flow ratio of only one times. We also expect it to continue to raise your dividends. It’s a buy.

APD’s shares aren’t especially cheap. Based on our estimate for fiscal 2017, they trade at a price-to-earnings, or P/E, ratio of about 18.2 times. But since APD plans to sell the Performance Materials Division, it expects to report earnings per share for fiscal 2017 of $6.25 to $6.50 a share. Based on an estimate of $6.50 a share, they trade around a hefty 20.6 times.

Mr. Ghasemi is upbeat about APD’s prospects. He said: “We continue to be very optimistic about the long-term great growth opportunities for our focused industrial gases business.”

APD is a U.S. global manufacturing stock to buy for long-term share price gains, decent and growing dividends as well as to further diversify your portfolio.


The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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