A Wall Street analyst believes the market is incorrectly discounting Air Products and Chemicals(NYSE: APD), creating a buying opportunity. Shares of the gas distributor are up more than 4% as of 1 p.m. ET on the upgrade.
Taking a second look at the business
Air Products is a distributor of essential gases to industrial and medical users. The company in recent years has lived in the shadows of industry leader Linde, and the valuation gap increased recently after Air Products missed on earnings and its stock plunged.
Today the company trades at an enterprise value about 13 times earnings before interest, taxes, depreciation, and amortization (EBITDA), compared to Linde's 18x multiple.
Bank of America analyst Steve Byrne believes that gap is overdone. The analyst upgraded Air Products to a buy, from neutral, citing what he sees as an unwarranted valuation disconnect with Linde. Byrne believes the market is concerned that Air Products has prioritized clean energy growth projects, including hydrogen energy, over its core business, but said that he believes that core business is not being neglected.
The upgrade is based on the belief that as the market recognizes the strength of the core business, and perception of Air Products' pipeline of business changes, the stock should rise.
Is Bank of America right to call Air Products a buy?
Ideally, investors want the best of both worlds. Air Products can use its established book of business to fund its aggressive push into clean energy, providing both a steady revenue base and the potential for future growth.
The question is how well management can balance the two priorities, especially amid an uncertain business climate and signs of retrenchment in China and elsewhere.
If Byrne is correct, and Air Products shows in the quarters to come investors overreacted to the fourth-quarter miss, the stock has plenty of room to go higher from here. Although future performance is never a given, Air Products looks like an intriguing opportunity for investors interested in gaining exposure to both a solid core business and the potential for hydrogen energy in the years to come.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America and Linde. The Motley Fool has a disclosure policy.
