Air Products Looks Solid

Peter Lynch loved a company with a boring name in a boring business with superior financials. The name Air Products & Chemicals (NYSE: APD  ) certainly doesn't set off many fireworks, but just thinking about its business sets my heart aflutter. If you know of another company that can show growth in flat-panel displays, home health care, semiconductor manufacturing, LNG imports, and the Canadian oil sands, please let me know.

Air Products released its first-quarter earnings report Wednesday, and on the surface, the numbers look rather ho-hum. Revenues were up 5% to $2.1 billion, and diluted earnings per share (EPS) increased 16% to $0.80 (after adjusting last year's figures for stock option expensing). Looking forward, the company upped its EPS guidance for the fiscal 2006 to a new range of $3.30 to $3.48, which translates to 7% to 13% growth over fiscal 2005.

Air Products comprises three business segments: gases, equipment, and chemicals, representing about 71%, 5%, and 24% of sales, respectively. Industrial gas revenues are driven by a broad group of growing industries. Refinery hydrogen is a major business where volume expansion is driving growth. More hydrogen is needed in the refining process, as refiners switch to heavier crude oil and adjust to new regulations requiring reductions in fuel sulfur content. Beyond oil refiners, industrial gas revenue comes from flat-panel display manufacturers, semiconductor manufacturers, and home health-care providers. Sales in this segment were up 8%, as was adjusted operating income.

In the equipment segment, Air Products is the leading supplier of LNG (liquefied natural gas) heat exchangers. Natural gas demand continues to grow, but domestic production has stagnated. To meet the demand, LNG construction spending is projected to increase from $7.2 billion in 2004 to $17.5 billion in 2009. Air Products & Chemicals is certainly benefiting, with a current order backlog at a record $690 million. Sales in this small segment were up 5%, and adjusted operating income was up a whopping 195%.

The chemical segment is having a tougher time, but the company is making the best of it. Chemical sales dropped 4% to $444 million, but the company was able to push through price increases, which increased adjusted operating income in the segment by 9%.

Perhaps the best thing about Air Products is the "locked-in" nature of much of the revenue. Looking again at refinery hydrogen, two new plants have just entered service, with four more to be completed in 2006. Air Products also recently received an order from Petro-Canada (NYSE: PCZ  ) to construct a hydrogen plant in Edmonton for use in upgrading the oil sands. Once the hydrogen from these plants is under contract, it will be a stable revenue stream for years to come.

With healthy earnings growth, dividends that have increased for 23 consecutive years, stock buybacks, and a diverse customer base in growing industries, Air Products has not gone unnoticed by investors. Its shares are up nearly 90% during the past five years, and the current P/E multiple is near 20. While Air Products is valued more richly than traditional chemical companies like Dow Chemical (NYSE: DOW  ) , the market has assigned similar premiums to more direct competitors such as Praxair (NYSE: PX  ) , BOC Group (NYSE: BOX  ) , and Air Liquide.

As much as I would love to wait for Air Products shares to trade at a lower price, the market rarely offers quality companies at a discount. Even if Air Products shares stall for a bit, owners get paid to wait since the company sports a dividend yield of 2.1%. Investors searching for a solid company to add to their portfolio could do much worse than take a closer look at Air Products.

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Fool contributor Robert Aronen does not own shares of any company mentioned.


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