Tuesday, November 23, 2010

Classical Gas

The continuing wrangle between Air Products and Chemicals, Inc. (APD: NYSE) and Airgas, Inc. (ARG: NYSE) took a turn today as the Delaware Supreme Court overturned a lower-court ruling. The Supreme Court action puts the brakes on Air Products fevered attempts to press Airgas into a merger.

Airgas management thinks the company is worth something north of $78 per share or 30.4 times trailing earnings. However, Air Products offer is short of that - $65.50 per share in cash, which values Airgas at 25.5 per share. Comparing the offer valuation to the Airgas consensus growth rate of 14.0% for the next five years, Air Products offer seems quite generous. The stock had been trading in the mid-40s before Air Products made the first of several successively higher offers in February 2010.

What does Airgas have that the other girls do not? For one thing it has a 5.4% net profit margin on $4.0 billion in annual revenue. Yet Air Products delivers an 11.7% net profit margin out of $9.0 billion in sales. There has to be something more. Airgas turns out a variety of gas products such as nitrogen, oxygen, argon, helium and hydrogen. Welding and fuel gases are also a part of its product portfolio. Its gas products are distributed through a network of over 1,000 locations around the county and an army of sales personnel numbering over 1,500. Tucking the Airgas business into its operation would make Air Products the largest industrial gas company in the U.S.

Recently, Airgas management issued guidance for earnings in the range of $3.15 to $3.30 in 2011 and $4.20 in 2012. At Airgas’ target price of $78 per share, the stock would be valued at a multiple of 24.8 times the lower end of the guidance range for 2011. If their guidance is reliable and not just a means to defend its cold reception for the Air Products offer, Air Gas could be quite a bargain even at the higher price. Air Products itself is trading at 13.5 times forward earnings.

Air Products has made it clear they will not give up easily. Even a proxy fight is not out of the question. However, the Delaware Supreme Court may have thrown a wrench in the works. Airgas now goes to its next shareholder meeting at the regularly scheduled date in October 2011.



Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. APD and ARG are included in the Alternative Oil and Gas group in Crystal Equity Research’s Beach Boys Index.

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