Industrial Gas Pricing – Talking a Good Game
Our recent thoughts on Industrial Gas companies have focused on their ability to pull pricing and cost levers to grow top and bottom lines. We have been particularly focused on APD and what it will need to deliver to justify further share price appreciation from here. Today, Air Products announced another round of price increases in the merchant business, as they have done in the past, but we think that the focus on achieving increases this time will be greater. The company is increasing prices for its North American merchant gas customers effective March 15, 2015 or as contracts expire. Monthly service charges will also be impacted.
As we wrote in the past, we believe that if Air Products is to beat its ambitious targets for 2017, the company will have to place an emphasis on cost and price that it has not in the past. So far, both imperatives have been given their due with the company announcing 500 job cuts in its most recent update. Still, we suspect that even if some 2500 more jobs are cut in the next 1 ½ to 2 years, expectations for APD may be difficult to manage.
With APD now pushing another round of price hikes, we expect that competitors will likely follow suit rather than use this as an opportunity to gain share. These price increases come on the back of similar increases announced six months ago and more modest increases pushed by Praxair at the end of 2014. APD states that this round of hikes is to pass through higher metals costs for bulk tanks, using similar reasoning to PX in its December announcement. We believe that the more likely motivation is margin expansion given our understanding of recent iron and steel price moves. In either case, the question is still how far can pricing be pushed before customers defect. Lack of volume growth in the business generally increases the focus on price as a way to grow top and bottom lines.
If the industry moves pricing more meaningfully than in recent years, then the optimistic top line estimates for APD shown below may be attainable. At the same time the estimates for PX and others will likely be too low. The valuation opportunity is in PX in the US, and possibly Air Liquide in Europe.