This Chemicals Stock Is Ready to Power Higher. Clean Hydrogen Is Helping.
Air Products and Chemicals has had a tough start to the year, but its stock is now too cheap to ignore.
“Tough” might not be doing Air Products’ decline justice. Shares have dropped 15% in 2024, to a recent $233.02, with a big chunk of that loss coming in February after the chemical company reported first-quarter earnings that missed expectations by a wide margin. Management also cut its full-year earnings guidance to $12.65 at the midpoint of its range, while noting that weakness in China was weighing on revenue.
That puts the second-quarter report—out April 30—in the spotlight. Analysts are forecasting sales of $3.05 billion, down from $3.2 billion during the same quarter in 2023, with earnings dipping to $2.70 a share, down from $2.74, as falling production costs are outweighed by higher interest expenses. Numbers like that would put the company well short of its full-year guidance, but the market seems OK with that—analysts have projected rising sales and earnings during the third and fourth quarters of this year.
That narrative seems reasonable. Analysts expect sales for the full year to grow just 1.8%, with Asia industrial gases’ revenue projected at 3.2% growth, not a big reach given that China’s economy is still growing and its first-quarter gross domestic product grew faster than expected. Plus, the company has traditional hydrogen projects in other regions, such as Saudi Arabia and Uzbekistan, that should add revenue. These projects have just begun to generate sales and are expected to continue to ramp up for the rest of this year.
“We expect incremental volume growth as some of these projects continue to ramp, which should help to offset the ongoing headwinds in Asia,” writes Wells Fargo analyst Michael Sison.
Investors will also be watching to see what the company says about the demand for clean hydrogen. In its 2023 10-K, released in November, Air Products said that it will invest more than $5 billion this year in new projects devoted to the fuel. That’s a lot to spend on a chemical that has essentially no demand at this point. Still, McKinsey estimates that sales of tens of millions of tons by 2030 isn’t out of reach. Any sign that the company is locking in contracts and strong pricing with clean-hydrogen customers could lift the stock, according to Vertical Research Partners analyst Kevin McCarthy, who calls clean hydrogen a key focal point.
All this isn’t a perfect setup for Air Products shares, but valuation is working in its favor. At 17.8 times 12-month forward earnings, the stock is rarely this cheap. Its current price/earnings ratio is well below its five-year average of 24.5 and near its lowest level since 2016. That’s a lot of bad news reflected in the stock.
Just a little bit of good news on April 30 should send shares higher.