LIN - Air Products and Chemicals: Rising Leverage And Lack Of Cash Generation Make Me Cautious For The Near-Term
2024-02-08 19:36:28 ET
Summary
- On February 6, APD issued a weak quarterly print, missing consensus estimates and cutting EPS guidance while reiterating its commitment to spend ~$5-5.5bn in FY24 Capex.
- While the print was certainly weak, I do not believe the results justified such as selloff as underlying revenues still grew by ~4% and all segments expanded EBITDA margins QoQ.
- I see the real issue in APD's cash flows as 3Y-rolling FCF margins have turned negative (LIN ~15%) while 3Y-rolling Capex exploded to 3x peers' level at ~35% of sales.
- With P/E multiples down ~11% since earnings, I estimate investors rerating management's massive bet on Hydrogen to more of a "show-me" story in an industry valued for its stability and defensive growth profile.
- With Moody's also flagging potential downgrade risk from rising leverage (~2x vs LIN) and a weak cash outlook, I see near-term risk outweighing the rewards and initiate at relative underweight (PT $210).
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Air Products and Chemicals: Rising Leverage And Lack Of Cash Generation Make Me Cautious For The Near-Term