Air Products & Chemicals Inc (APD, Financial) has recently seen a daily gain of 1.02%, despite a 3-month loss of -4.56%. With an Earnings Per Share (EPS) (EPS) of 9.83, the question arises: Is the stock modestly undervalued? This article aims to answer this question through a detailed valuation analysis. We invite you to read on to gain a comprehensive understanding of the intrinsic value of Air Products & Chemicals.
Company Introduction
Founded in 1940, Air Products & Chemicals has grown into a leading global industrial gas supplier, with operations across 50 countries and a workforce of 19,000 employees. The company is known for being the world's largest supplier of hydrogen and helium. Serving a diverse portfolio of industries such as chemicals, energy, healthcare, metals, and electronics, Air Products & Chemicals generated a revenue of $12.7 billion in fiscal 2022. The current stock price stands at $281.94, while the estimated fair value according to the GF Value is $323.23.
Understanding the GF Value
The GF Value is a proprietary measure of a stock's intrinsic value, calculated based on historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line on our summary page provides an overview of the fair value at which the stock should ideally trade.
According to this method, Air Products & Chemicals (APD, Financial) appears to be modestly undervalued. If the share price is significantly above the GF Value Line, the stock may be overvalued, indicating poor future returns. Conversely, if the share price is significantly below the GF Value Line, the stock may be undervalued, suggesting higher future returns. Given its current price of $281.94 per share, Air Products & Chemicals stock shows signs of being modestly undervalued. As a result, the long-term return of its stock is likely to be higher than its business growth.
Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, it is crucial for investors to carefully review a company's financial strength before deciding to buy shares. A good initial perspective on the company's financial strength can be obtained by looking at the cash-to-debt ratio and interest coverage. Air Products & Chemicals has a cash-to-debt ratio of 0.19, which ranks worse than 80.29% of 1502 companies in the Chemicals industry. Based on this, GuruFocus ranks Air Products & Chemicals's financial strength as 6 out of 10, suggesting a fair balance sheet.
Profitability and Growth
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Air Products & Chemicals has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $13 billion and Earnings Per Share (EPS) of $9.83. Its operating margin is 20.81%, which ranks better than 90.66% of 1521 companies in the Chemicals industry. Overall, the profitability of Air Products & Chemicals is ranked 8 out of 10, which indicates strong profitability.
Growth is one of the most important factors in the valuation of a company. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Air Products & Chemicals is 12.3%, which ranks better than 58.7% of 1448 companies in the Chemicals industry. The 3-year average EBITDA growth is 6.2%, which ranks worse than 57.97% of 1337 companies in the Chemicals industry.
ROIC vs WACC
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Air Products & Chemicals's return on invested capital is 9.31, and its cost of capital is 8.97.
Conclusion
In summary, the stock of Air Products & Chemicals (APD, Financial) shows every sign of being modestly undervalued. The company's financial condition is fair, and its profitability is strong. Its growth ranks worse than 57.97% of 1337 companies in the Chemicals industry. To learn more about Air Products & Chemicals stock, you can check out its 30-Year Financials here.
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