Takeaway: We added APD to Investing Ideas on the long side on 7/27.

Stock Report: Air Products (APD) - HE APD table 08 08 17 11

THE HEDGEYE EDGE

Given a favorable economic and consolidation backdrop, there are many straightforward reasons to favor the industrial gas industry at present.  Overhangs on Air Products (APD) shares, from the not-so-straightforward Yingde deal to changes to the position sizes of certain activist funds, have largely moved out of the picture.  As projects mature and the company invests substantial available capital in PX/Linde divestitures, other well-suited deals, or buybacks, it becomes hard to avoid well above consensus EPS forecasts.

INTERMEDIATE TERM (TREND)

An initial point in our long thesis is that industrial activity is improving well ahead of estimates.  That tailwind is helpful to APD in the near-term. Positive pricing and volumes in North America, and more specifically, enhanced utilization in China should provide continued price improvement on the heels of decent economic growth.  Mostly, the environment continues to look more supportive.

LONG TERM (TAIL)

Praxair and Linde divestitures put the initial capital deployments in sight.  The operating improvements over the past few years at APD have been impressive. We do not anticipate management to bungle investments, as their track record with respect to operations has been well disciplined.  They certainly won’t get all of $9+ billion wrong, and the initial round should be strong assets divested for regulatory reasons.  The low cost of debt is favorable as well. As soon as APD deploys its balance sheet, the market is likely to price in much more – the pathway should be obvious at that point, making it key to enter ahead of it.

ONE-YEAR TRAILING CHART

Stock Report: Air Products (APD) - HE APD chart 08 08 17