Shares of specialty chemicals producer (actually, it produces pure gases for industrial applications, such as oxygen, nitrogen, argon, hydrogen, helium, and carbon dioxide) Air Products and Chemicals (APD 0.43%) suffered a 10.8% sell-off through 11:30 a.m. ET after reporting mixed earnings this morning.
Heading into Air Products' quarterly report, analysts had forecast the gases manufacturer would earn only $3.12 per share, and Air Products beat that estimate, reporting $3.15 per share in "adjusted" (i.e., non-GAAP) profit for the fourth and final quarter of its fiscal 2023. On sales, however, investors were disappointed to see Air Products book less than $3.2 billion in sales where Wall Street had forecast $3.35 billion.
Air Products sales and earnings
And yet Air Products' news was still pretty good. Sales may have declined more than hoped in Q4 -- about 11% year over year -- but the decline for the full year was less than 1%, with Air Products booking $12.6 billion in revenue for the year.
GAAP profits were grand, with Air products growing its earnings as calculated according to generally accepted accounting principles (GAAP) a modest 2% for the year ($10.30 per share in all) but 20% for the quarter ($3.08 per share).
Is Air Products stock a buy?
Rather than earnings and earnings growth, therefore, I see the problem with Air Products stock lying more in the stock's valuation. Consider that at a share price of $258 and change, the $10.30 per share that Air Products earned in fiscal 2023 results in a P/E ratio of more than 25.
That's not a great price even if Air Products did grow 20% in Q4. It's an especially not-great price given that the company grew full-year earnings only 2%.
Granted, on the guidance front, Air Products is telling investors that its earnings in fiscal 2024 (currently underway) could be as high as $13.10 per share. Even if Air Products maxes out its guidance, however, that still works out to a forward P/E ratio of nearly 20 -- and that's assuming that the company's GAAP profits are as good as its pro forma earnings, which they were not in 2023.
In fact, "adjusted profits" lagged reported net income by about 10% in fiscal 2023. If you assume a similar discrepancy in 2024, then this stock is actually probably trading for closer to 22 times forward earnings -- and in my opinion, it's simply not growing fast enough to justify that price.
