We see the following risks to the stock achieving our target price:
A deep recession could negatively impact the company's volumes. We believe the risks associated with a potential dip in economic activity are partially offset by the company's solid project backlog and long-term growth prospects. Also, the industrial gas industry has consolidated from roughly 10 major global players in the early 1990s to four major gas companies today, providing a favorable competitive environment.
Air Products is exposed to FX risk with 55%+ of revenues coming from outside the Americas segment. Air Products is also more exposed to geopolitical risk as it takes on more and more large gasification projects in Southeast Asia, China, India, and the Middle East.
Air Products' industrial gas business is highly leveraged to US manufacturing. Lower-end market demand and lower-than-anticipated growth rates for some of the company's businesses could have a negative impact. However, an upside risk is that a stronger-than-expected economic recovery could allow the shares to outperform.
APD is exposed to volatile natural gas and energy costs. The company’s hydrogen business uses natural gas, but there is a contractual pass-through of natural gas prices built into hydrogen pricing that protects the business. Lower oil prices could negatively impact volumes of liquid nitrogen and/or CO2 for hydraulic fracturing. However, this business is relatively small in the context of APD’s portfolio.
If the impact on the company from any of these factors proves to be greater than we anticipate, the stock could have difficulty achieving our target price. On the other hand, we may have overestimated these risk factors, and the stock could increase more than we expect.
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