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Key Takeaways
- Strategic focus on clean hydrogen and divestment of non-core business indicates a future revenue growth from green initiatives and improved net margins through efficiency.
- Investments in hydrogen fuel cell transport and a focus on dividend growth demonstrate diversification and confidence in future earnings based on solid financial health and strategic foresight.
- High reliance on regulatory approvals and market acceptance of clean hydrogen projects, coupled with global macroeconomic instability, may impact growth and profitability.
Catalysts
About Air Products and Chemicals- Provides atmospheric gases, process and specialty gases, equipment, and related services in the Americas, Asia, Europe, the Middle East, India, and internationally.
- The green hydrogen supply agreement with TotalEnergies, starting in 2030, demonstrates demand and validation for Air Products' long-term strategy in clean hydrogen, signaling potential future revenue growth from green hydrogen initiatives.
- Divestment of the LNG Technology and Equipment business to Honeywell for approximately $1.8 billion strengthens the balance sheet and focuses company resources on core operations, potentially improving net margins through operational efficiencies.
- Investment in hydrogen fuel cell trucks and plans to build a hydrogen fueling station network indicate expansion into the clean energy transition for heavy transport, suggesting future revenue streams from new markets and enhanced product offerings.
- Execution of a two-pillar growth strategy focused on operational excellence in industrial gas and energy transition projects in clean hydrogen positions the company for diversified growth, potentially impacting revenue and EBITDA margins positively.
- Commitment to dividend growth backed by strong cash flows from operations and strategic capital raising actions reflects confidence in future earnings growth, thus potentially signaling underappreciated value based on solid financial health and foresight in capital allocation.
Assumptions
How have these above catalysts been quantified?- Analysts are assuming Air Products and Chemicals's revenue will grow by 10.2% annually over the next 3 years.
- Analysts assume that profit margins will increase from 21.2% today to 22.3% in 3 years time.
- Analysts expect earnings to reach $3.6 billion (and earnings per share of $16.24) by about August 2027, up from $2.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $3.4 billion in earnings, and the most bearish expecting $3.0 billion.
- In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.2x on those 2027 earnings, down from 24.1x today. This future PE is lower than the current PE for the US Chemicals industry at 24.6x.
- Analysts expect the number of shares outstanding to grow by 0.07% per year for the next 3 years.
- To value all of this in today's dollars, we will use a discount rate of 6.81%, as per the Simply Wall St company report.
Risks
What could happen that would invalidate this narrative?- High reliance on regulatory approval for key projects like the Louisiana blue hydrogen and World Energy's SAF project could delay timelines, impacting projected revenue and growth in net margins.
- Initiatives such as the ambitious green hydrogen projects (e.g., NEOM) face market acceptance risks, potentially affecting long-term sales and earnings growth if demand does not meet expectations.
- Global macroeconomic instability, including potential impacts from election outcomes and Federal Reserve decisions, could lead to broader market volatility affecting investment and financing conditions, impacting Air Products’ capital expenditure plans and return on capital employed (ROCE).
- The green hydrogen agreement with TotalEnergies, while pioneering, introduces execution risk as Air Products scales up to meet significant long-term supply commitments, impacting both revenue and operating margins if not managed effectively.
- Air Products’ strategic focus on transitioning to clean hydrogen and divesting from other business units (e.g., the sale of LNG Process Technology and Equipment business to Honeywell) could limit diversification, increasing vulnerability to the clean energy segment’s market risks and potentially affecting overall profitability and EBITDA margins.
Valuation
How have all the factors above been brought together to estimate a fair value?- The analysts have a consensus price target of $297.77 for Air Products and Chemicals based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $355.0, and the most bearish reporting a price target of just $210.0.
- In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $16.2 billion, earnings will come to $3.6 billion, and it would be trading on a PE ratio of 22.2x, assuming you use a discount rate of 6.8%.
- Given the current share price of $278.47, the analyst's price target of $297.77 is 6.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
- We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.
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Disclaimer
Warren A.I. is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by Warren A.I. are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that Warren A.I.'s analysis may not factor in the latest price-sensitive company announcements or qualitative material.