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APD Stock Study (2-18-23)

I recently did a stock study on Air Products and Chemicals Inc. (APD) with a closing price of $281.49.

M* writes:

     > Since its founding in 1940, Air Products has become one of the
     > leading industrial gas suppliers globally, with operations in
     > 50 countries and 19,000 employees. The company is the largest
     > supplier of hydrogen and helium in the world. It has a unique
     > portfolio serving customers in a number of industries, including
     > chemicals, energy, healthcare, metals, and electronics.

This large-sized company has grown sales and earnings at annualized rates of 0.8% and 8.9% over the last 10 years, respectively. Sales had a long period of flat time (from ’14-’21) while EPS was only down in ’14 and ’17-’18. Over the last 10 years, PTPM trended higher from 13.3% to 21.7% with a last-5-year average of 24.3%. This leads peer and industry averages. ROE was 15.3% in ’13 and has averaged 15.4% over the last five years. This is about even with the industry while slightly lagging peer averages.

Debt-to-Capital has come down from 47.1% in ’13 to 38.8% in ’22 with a last-5-year average of 33.3%. This is lower than peer and industry averages. As of the most recent quarter, Interest Coverage is 21 and Quick Ratio 1.68. Value Line gives APD an A++ for financial strength and M* rates its capital allocation as Exemplary.

I assume long-term annualized sales growth of 6% based on the following:

I assume long-term annualized EPS growth of 8% based on the following:

I am forecasting below all six long-term estimates (mean 11.3%).

My Forecast High P/E is 22. High P/E has trended up from 22.4 (’13) to 31.4 (’22) with a last-5-year average of 31.9. I’m projecting just below the entire range.

My Forecast Low P/E is 20. Low P/E has trended up from 15 (’13) to 21.5 (’22) with a last-5-year average of 21.9. I’d like to use 18, but the market has been very bullish recently.

My Low Stock Price Forecast is the default value of $202.60. This is 28% below the previous closing price and 6.3% below the ’21-’22 low of $216.20. I think this is reasonable despite being more aggressive with my Forecast Low P/E.

Over the last 10 years, Payout Ratio has ranged from 48.8% (’16) to 71.9% (’17) with a last-5-year average of 62%. I am estimating low at 48%.

These inputs land APD in the HOLD zone with an U/D ratio of 1.0. The Total Annualized Return is 7.5%.

PAR (using forecast average, not high, P/E) is 5.9%: less than I seek for a large company. Like many other stocks, this is a tough time to buy with shares up ~23% in the last four months.

To assess margin of safety (MOS), I compare my inputs with those of Member Sentiment (MS). Out of 116 studies over the past 90 days (my own excluded), projected sales growth, EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio average 7.3%, 10.6%, 28.4, 21.3, and 66.4%, respectively. I am lower on all inputs. Value Line projects an average annual P/E of 23.5: lower than MS (24.9) and higher than mine (21). MS Low Stock Price Forecast is almost identical to mine at $202.4. All this is indicative of a healthy MOS for the study.

I would feel comfortable buying APD under $241/share.

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