Why Air Products Stock Is Inflated Today

Wall Street analysts believe the market is discounting incorrectly. Air products and chemicals (APD 4.34%), creating purchasing opportunities. Shares of the gas distributor were up more than 4% as of 1pm ET on the upgrade.

Take a second look at your business

Air Products is a distributor of essential gases to industrial and medical users. In recent years, the company has lived in the shadow of industry leaders. LindeThe valuation gap widened recently after Air Products performed poorly and its stock price plummeted.

Today the company trades at an enterprise value of about 13 times earnings before interest, taxes, depreciation, and amortization (EBITDA), compared with Linde’s 18 times multiple.

bank of america Analyst Steve Byrne believes the gap is excessive. The analyst upgraded Air Products from Neutral to Buy due to the unwarranted valuation disconnect with Linde. Byrne said he believes the market is concerned about Air Products prioritizing clean energy growth projects, including hydrogen energy, over its core business, but that its core business is not being ignored.

This upgrade is based on the belief that the stock should rise as the market recognizes the strength of its core business and awareness of Air Products’ business transformation pipeline grows.

Does Bank of America have the 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 future growth potential.

The question is how well management can balance the two priorities, especially amid an uncertain business environment and signs of contraction in China and elsewhere.

If Byrne is correct and Air Products ends up having a quarter where investors overreacted to poor fourth-quarter earnings, the stock has plenty of room to rise from here. Although future performance is by no means given, Air Products appears to be an interesting opportunity for investors interested in its strong core business and the potential of hydrogen energy going forward.