Air Products Earnings: Solid Results and Outlook Overshadowed by Backlog Uncertainty

Narrow-moat-rated Air Products’ APD fiscal fourth-quarter adjusted EPS of $3.15 beat our estimate by $0.04. For full-year fiscal 2024 management anticipates adjusted EPS of $12.80 to $13.10, which implies a roughly 12.5% year-over-year increase at the midpoint. Despite the earnings beat and a solid outlook for fiscal 2024, the stock plunged by nearly 13%, which we think reflects the market’s concerns about the industrial gas firm’s project backlog. After rolling our model forward one year, we’ve reduced our fair value estimate to $314 from $319, as our slightly lower operating margin projections were partially offset by time value of money.

The company provided an update on the Louisiana blue hydrogen project and now expects the total capital required to be around $7 billion, up from the original 2021 estimate of $4.5 billion. Management said on the call that roughly $1 billion of the cost increase is due to inflation, with the remainder attributable to capitalized interest as well as additional investment in the facility (including land, infrastructure, and utilities) to prepare for future expansion. Despite the higher capital cost, management still expects the project to generate a double-digit IRR on the expanded $7 billion investment, which we consider realistic as the original return target did not include benefits from the Inflation Reduction Act.

We remain optimistic about the long-term outlook for Air Products, as we continue to expect the company to capitalize on growing investment in blue and green hydrogen. As the firm’s large projects near completion, we think that the market’s focus will increasingly turn from new project announcements to execution, and uncertainty around the backlog could weigh on the stock. That said, shares are now trading at a nearly 20% discount to our updated fair value estimate, which we see as an attractive entry point for investors with a long-term horizon.