Air Products and Chemicals Inc (APD)

Conclusion

Air Products and Chemicals is a US specialty chemicals company. It produces atmospheric gases such as oxygen, nitrogen and argon, process gases such as hydrogen and helium, and specialty gases, and it designs equipment for air separation and gas liquefaction. At a price of 311.08 USD, its market capitalisation is 69.3 billion USD.

The verdict is overvalued. The P/E of 130.2 compares with a ten-year median of 29.5, and EV/EBITDA of 111.3 compares with 15.8. The DCF gives 36.80 USD per share at a discount rate of 8.87%. The fair value band runs from 109.46 to 164.19 USD with a midpoint of 136.82 USD, a margin of safety of -56.0% at the current price. The reverse DCF implies growth of 33.7% a year, while revenue grew at a 4.7% compound rate over five years and free cash flow per share fell at 11.5% a year.

The strongest numbers are a Piotroski score of 4 of 4, a dividend yield of 2.3%, and seven earnings beats in the last eight quarters. The weakest are an operating margin of -0.3% against a ten-year median of 20.9%, a ROIC of -0.12% against a WACC of 8.04%, and net debt to EBITDA of 21.7x.

Financial health

Financial health is red, pulled down by net debt to EBITDA of 21.7x and interest coverage of -0.19, which reflects the company's negative operating margin. The current ratio of 1.07 and quick ratio of 0.87 give some short-term cover, and debt to equity stands at 1.05. The Altman Z-score is not available because its inputs are missing. The Altman model was designed for manufacturers, so its reading would need that context. Insolvency risk is not assessable, because the figures the Ohlson model requires are not available.

Earnings quality

Earnings quality is yellow: the Piotroski score and share count are sound, but cash conversion is weak over the longer term. Free cash flow conversion is 89.6% on a trailing basis but -88.7% over five years. Stock-based compensation is 0.39% of revenue, and free cash flow after it is 426.4 million USD. The five-year share count change is a rise of 0.04% a year, so there are no meaningful buybacks. The Piotroski score is 4 of 4. The Beneish M-score and the accrual ratio are not reported. The company beat estimates in seven of the last eight quarters, with an average surprise of 1.4%. Estimates for the next year were revised down by 0.6% over 90 days, while the current year was revised down by 0.4%, with four downward and two upward revisions in the last 30 days.

Profitability

Profitability is red. The operating margin of -0.3% compares with a ten-year median of 20.9%, and the net margin of 4.1% compares with 19.0%. The gross margin of 31.6% is close to its median of 31.1%. ROIC of -0.12% sits against a WACC of 8.04%, a ROIC minus WACC of -8.16%, which the model classes as destroying value. The five-year median ROIC is 14.4%. Return on equity is 3.1%. The DuPont split beyond net margin is not available, so it is not possible to show how much leverage props up the return. Operating margin stability is 0.68.

Growth

Growth is yellow. Revenue grew at a compound rate of 1.0% over three years, 4.7% over five years and 5.6% over ten years. Revenue rose in five of the last ten comparable years. Earnings per share fell at compound rates of 38.6% over three years, 24.0% over five years and 1.9% over ten years. Free cash flow per share fell at 11.5% a year over five years and 12.4% over ten. The next-year earnings estimate implies growth of 8.2%, which is the one forward growth signal the data shows as favourable.

Valuation

Valuation is red. Against their own ten-year medians, the P/E of 130.2 (median 29.5) carries a premium of 341.1%, EV/EBITDA of 111.3 (median 15.8) a premium of 602.6%, and price to free cash flow of 145.3 (median 75.1) a premium of 93.5%. Price to sales of 5.33 (median 5.36) and price to book of 4.04 (median 4.30) sit close to or below their medians. The DCF gives 36.80 USD per share, at a discount rate of 8.87% and a terminal growth rate of 2.5%, with 56.6% of value in the terminal period. The reverse DCF implies 33.7% growth, against 4.7% delivered over five years. The fair value from historical multiples is 236.85 USD. The fair value band is an order of magnitude built on fixed assumptions, including a 5% equity risk premium, and is not a price target. The dividend yield is 2.3% and the forward yield 2.4%, but the payout on free cash flow is 336.2%. The currency is USD.

Risks

The main risk is that the earnings base does not recover. Operating margin of -0.3% and interest coverage of -0.19 mean the company is not covering its interest from operations. Net debt of 21.7x EBITDA leaves little room for error, so any further fall in profit would weigh directly on its financing. Negative ROIC against an 8.04% WACC means that new investment is currently reducing value, and free cash flow per share has fallen for years. The Altman Z-score, the Ohlson insolvency estimate, the accrual ratio, the Beneish M-score and the DuPont split are not available, so these risks cannot be measured precisely. This analysis does not include a debt maturity schedule or revenue by segment, which would show how refinancing and individual business lines affect the outlook.