Air Products and Chemicals, Inc.'s (NYSE:APD) Shareholders Might Be Looking For Exit

It's not a stretch to say that Air Products and Chemicals, Inc.'s (NYSE:APD) price-to-earnings (or "P/E") ratio of 19.4x right now seems quite "middle-of-the-road" compared to the market in the United States, where the median P/E ratio is around 19x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Recent times have been advantageous for Air Products and Chemicals as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Air Products and Chemicals

Want the full picture on analyst estimates for the company? Then our free report on Air Products and Chemicals will help you uncover what's on the horizon.

How Is Air Products and Chemicals' Growth Trending?

The only time you'd be comfortable seeing a P/E like Air Products and Chemicals' is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered an exceptional 67% gain to the company's bottom line. The latest three year period has also seen an excellent 89% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 2.1% per year as estimated by the analysts watching the company. That's not great when the rest of the market is expected to grow by 11% per annum.

In light of this, it's somewhat alarming that Air Products and Chemicals' P/E sits in line with the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

The Final Word

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Air Products and Chemicals' analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its P/E as much as we would have predicted. When we see a poor outlook with earnings heading backwards, we suspect share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Air Products and Chemicals (at least 1 which doesn't sit too well with us), and understanding these should be part of your investment process.

If you're unsure about the strength of Air Products and Chemicals' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.