Standing out among the Street's worst performers today is Air Products and Chemicals, a specialty chemicals company whose shares slumped -5.3% to a price of $280.06, 15.33% below its average analyst target price of $330.76.
The average analyst rating for the stock is buy. APD underperformed the S&P 500 index by -5.0% during today's afternoon session, but outpaced it by 25.0% over the last year with a return of 28.1%.
Air Products and Chemicals, Inc. provides atmospheric gases, process and specialty gases, equipment, and related services in the Americas, Asia, Europe, the Middle East, India, and internationally.
Air Products and Chemicals's trailing 12 month P/E ratio is 27.6, based on its trailing EPS of $10.14. The company has a forward P/E ratio of 22.4 according to its forward EPS of $12.5 -- which is an estimate of what its earnings will look like in the next fiscal year. As of the first quarter of 2023, the average Price to Earnings (P/E) ratio for US industrials companies is 20.49, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
To better understand APD’s valuation, we can divide its price to earnings ratio by its projected five-year growth rate, which gives us its price to earnings, or PEG ratio. Considering the P/E ratio in the context of growth is important, because many companies that are undervalued in terms of earnings are actually overvalued in terms of growth.
Air Products and Chemicals’s PEG is 2.84, which indicates that the company is overvalued compared to its growth prospects. Bear in mind that PEG ratios have limits to their relevance, since they are based on future growth estimates that may not turn out as expected.
To understand a company's long term business prospects, we must consider its gross profit margins, which is the ratio of its gross profits to its revenues. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost. After looking at its annual reports, we obtained the following information on APD's margins:
| Date Reported | Revenue ($ k) | Cost of Revenue ($ k) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-09-30 | 12,698,600 | 9,338,500 | 26.46 | -12.93 |
| 2021-09-30 | 10,323,000 | 7,186,100 | 30.39 | -10.22 |
| 2020-09-30 | 8,856,300 | 5,858,100 | 33.85 | 2.58 |
| 2019-09-30 | 8,918,900 | 5,975,500 | 33 | n/a |
- Average gross margin: 30.9 %
- Average gross margin growth rate: -5.4 %
- Coefficient of variability (higher numbers indicating more instability): 10.7 %
We can see from the above that Air Products and Chemicals's gross margins are very strong. Potential investors in the stock will want to determine what factors, if any, could derail this attractive growth story.
To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in Air Products and Chemicals's free cash flow, which was $303.7 Million as of its most recent annual report. This represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With its strong cash flows, APD is in a position to do either -- which can encourage more investors to place their capital in the company. Over the last four years, the company's free cash flow has been growing at a rate of -25.4% and has on average been $729.32 Million.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). Air products and chemicals's P/B ratio is 4.46 -- in other words, the market value of the company exceeds its book value by a factor of more than 4, so the company's assets may be overvalued compared to the average P/B ratio of the Industrials sector, which stands at 3.78 as of the first quarter of 2023.
Since it has an inflated P/E ratio, an average P/B ratio, and consistent free cash flow with a downwards trend, Air Products and Chemicals is likely overvalued at today's prices. The company has mixed growth prospects because of an inflated PEG ratio and strong margins with a negative growth trend. We hope you enjoyed this overview of APD's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.
