Air Products and Chemicals: Capital Discipline and Margin Expansion Fuel Turnaround Potential

Air Products and Chemicals (APD) is undergoing a strategic transformation under new CEO Eduardo F. Menezes, prioritizing capital discipline and margin expansion amid a challenging industrial landscape. The company's decision to cut capital expenditures, reduce its workforce, and refocus on high-return projects with guaranteed demand has positioned it as a compelling turnaround play. Despite recent headwinds, including a 10% stock decline since March 2025, APD's strategic repositioning and undervalued valuation make it an intriguing opportunity for investors.

Strategic Shifts: Capital Cuts and Project Prioritization

APD's most significant moves in 2025 include slashing capital expenditures and restructuring its workforce. The company aims to reduce annual CapEx by $2.5 billion by 2030, focusing on projects with secured demand streams, such as its NEOM Green Hydrogen Complex (80% complete, targeting production by late 2026) and a Louisiana clean energy partnership with TotalEnergies. Meanwhile, workforce reductions of 2,500–3,000 positions by 2028 aim to streamline operations and boost efficiency.

These cuts are part of a broader strategy to address past project delays, cost overruns, and rising debt. APD's adjusted EPS for Q2 2025 fell by $0.16 year-over-year, but its $12.15 upper-end FY2025 guidance reflects confidence in its core industrial gas business (24% operating margin) and long-term hydrogen growth.

Margin Expansion Potential

APD's focus on high-margin industrial gas operations and green hydrogen projects could drive margin improvements. The company's industrial gas division generated $12 billion in sales in 2024, with stable demand from data centers, AI, and manufacturing. New projects like NEOM—backed by a 15-year take-or-pay agreement—offer visibility and scalability. By 2030, hydrogen is projected to be a $600–$1 trillion market, positioning APD as a leader in decarbonization solutions.

Contrasting with Linde's Stability

While Linde (LIN) maintains stronger free cash flow ($3.72 billion TTM vs. APD's -$2.33 billion) and a lower debt-to-equity ratio (0.73 vs. APD's 0.85), APD's valuation appears more attractive. Linde trades at a 33% premium to its intrinsic value, while APD is overvalued by just 18%. APD's 2.7% dividend yield—versus Linde's 1.4%—adds income appeal.

Analyst Sentiment: Bullish Long-Term, Cautious Near-Term

RBC Capital Markets recently upgraded APD to Outperform, citing its $355 price target and recovery plan targeting high single-digit EPS growth. RBC argues the 10% pullback since March 2025 creates a compelling entry point. However, UBS trimmed its target to $324 from $335, citing near-term cost pressures.

The mixed signals reflect short-term execution risks but highlight APD's long-term upside. Consensus estimates for FY2025 EPS ($12.70–$13.00) align with management's guidance, suggesting analysts see value in its restructuring.

Investment Thesis

Buy APD at current levels ($320.80 as of March 2025):
- Undervalued Turnaround: APD's stock has fallen 10% since March, creating a discount to its intrinsic value.
- Margin Improvements Ahead: CapEx cuts and cost discipline should lift operating margins from 2026 onward.
- Hydrogen Growth: Projects like NEOM and Louisiana offer scalable, high-margin opportunities.
- Dividend Safety: APD's “Very Safe” dividend history underscores financial resilience.

Historical backtests of similar entry points reveal limited upside. From 2020–2025, a strategy buying APD on positive earnings announcements and holding until a 10% gain or 20 days delivered a CAGR of just 2.53%, with excess returns of -94.01% and a Sharpe ratio of 0.11. This underscores the difficulty of capturing short-term momentum, reinforcing the need for a long-term horizon focused on margin expansion and hydrogen execution.

Risks to Consider:
- Near-term EPS volatility due to helium market declines and cost overruns.
- Execution risks from activist investor Mantle Ridge's board pressure.
- Global economic slowdown impacting industrial demand.

Conclusion

Air Products' strategic moves—capital cuts, project prioritization, and hydrogen leadership—position it as a high-conviction turnaround play. While UBS's caution underscores near-term challenges, RBC's bullish stance and APD's undervalued stock after its 10% decline make it an attractive buy for investors with a 3–5 year horizon. The hydrogen market's growth potential and disciplined capital allocation suggest APD could deliver outsized returns as it transitions from project overreach to margin-driven resilience.