We think the market is missing Air Products’ (APD) tremendous revenue growth potential. We have raised our fair value estimate for the industrial gas producer in addition to increasing our moat trend rating and stewardship rating. Management has made great strides in its ambitious plan to deploy roughly $15 billion of capital over the next five years, having committed almost $8 billion thus far. We expect that as new projects come on line and start contributing to the bottom line over the next few years, the market will eventually take notice.
Air Products benefits from operating in an industry with a very favorable structure. Despite selling what are essentially commodities, public industrial gas companies have consistently delivered lucrative returns because of their economic moats. Industrial gases typically account for a relatively small fraction of customers’ costs but are a vital input to ensure uninterrupted production. As such, customers are often willing to pay a premium and sign long-term contracts to ensure their businesses run smoothly. Long-term contracts and high switching costs contribute to industrial gas producers’ moats, helping them generate a predictable cash flow stream and lucrative returns.
Krzysztof Smalec, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.