Chemicals company Air Products and Chemicals is taking Wall Street by surprise today, falling to $250.41 and marking a -4.8% change compared to the S&P 500, which moved 1.0%. APD is -11.59% below its average analyst target price of $283.23, which implies there is more upside for the stock.
As such, the average analyst rates it at buy. Over the last year, Air Products and Chemicals has underperfomed the S&P 500 by -33.8%, moving -13.0%.
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. The company belongs to the industrials sector, which generally includes cyclical companies -- with the exception of conglomerates whose business may span several industries. Cyclical companies experience higher sales during periods of economic expanision, and worsening outlooks during recessions.
Air Products and Chemicals's trailing 12 month P/E ratio is 22.6, based on its trailing EPS of $11.07. The company has a forward P/E ratio of 18.7 according to its forward EPS of $13.36 -- which is an estimate of what its earnings will look like in the next quarter. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the second quarter of 2024, the industrials sector has an average P/E ratio of 25.19, and the average for the S&P 500 is 28.21.
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 3.26, 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.
When we subtract capital expenditures from operating cash flows, we are left with the company's free cash flow, which for Air Products and Chemicals was $-1420700000 as of its last annual report. The balance of cash flows represents the capital that is available for re-investment in the business, or for payouts to equity investors as dividends. The company's average cash flow over the last 4 years has been $-721033333.3 and they've been growing at an average rate of -18.0%. APD's weak free cash flow trend shows that it might not be able to sustain its dividend payments, which over the last 12 months has yielded 2.7% to investors. Cutting the dividend can compound a company's problems by causing investors to sell their shares, which further pushes down its stock price.
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 3.73 -- in other words, the market value of the company exceeds its book value by a factor of more than 3, so the company's assets may be overvalued compared to the average P/B ratio of the Industrials sector, which stands at 3.17 as of the second quarter of 2024.
Since it has a Very low P/E ratio, an average P/B ratio, and negative cash flows with a downwards trend, Air Products and Chemicals is likely fairly valued at today's prices. The company has mixed growth prospects because of an inflated PEG ratio and strong operating margins with a stable 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.
