APD Air Products and Chemicals Inc

The industrial gases company Air Products & Chemicals Inc. (APD) announced price increases of 15% for liquid and bulk helium gases in North America effective September 1, 2011.

Strong demand for helium and its tight supply have resulted in the price increase. The supply of helium across the globe has been tight with product allocations implemented by the U.S. Bureau of Land Management and with many other global helium sources producing below capacity.

Also, helium sources located primarily outside of the U.S. are extremely expensive; wholesale prices for crude and processed liquid helium have increased, and costs have escalated for power and diesel.

It is expected that demand will exceed supply for the next two to three years, thus creating ongoing shortages in the market.  

Recently, the company reported third quarter fiscal 2011 EPS of $1.46, versus $1.17 in the year-earlier quarter and matched the Zacks Consensus Estimate of $1.46. The results exclude a 4-cent gain in discontinued operations recognizing a tax benefit from the sale of the company's U.S. healthcare operations in 2009.

Net sales amounted to $2.6 billion, versus $2.3 billion in the prior-year quarter, moving ahead of the Zacks Consensus Estimate of $2.5 billion. The improved results were mainly driven by higher volumes in the Electronics and Performance Materials and Tonnage Gases segments.

The company witnessed strong volume growth across a number of businesses mainly in the Asia Merchant business and the energy and electronics markets. However, U.S. and Europe Merchant businesses saw slower growth.

For the quarter ahead, the company forecasts strong revenue growth in the Tonnage, and Electronics and Performance Materials segments. The company also expects to improve margins in the next quarter based on its actions to improve Merchant segment performance.

Management expects fourth quarter EPS between $1.48 and $1.53. The company raised the full fiscal year EPS guidance between $5.70 and $5.75 per share from $5.65 and $5.75 previously.

Last month, the company also announced new financial targets for the 2015 timeframe. The company expects to deliver top line growth of 11% to 13% per year over the next four years, which would take its total revenues to over $15 billion in 2015. Air Products also expects to improve its operating margin to 20% and its return on capital to 15% by 2015.

Based in Pennsylvania, Air Products benefits from a long-term take-or-pay contract, a consolidated industry structure, a diverse customer base and sustained pricing power. However, soaring energy and raw material costs pose a threat to margin expansion.

In order to compensate for escalating raw material costs, Air Products has been increasing the price for a range of chemicals it makes for industrial use. Air Products faces stiff competition from Praxair Inc. (PX) and The Linde Group.

We currently have a Zacks #3 Rank (short-term Hold recommendation) on the stock.

 
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