Earnings

Critical Comparison: Air Products and Chemicals, Inc. (APD) vs. Ashland Global Holdings Inc. (ASH)

Air Products and Chemicals, Inc. (NYSE:APD) shares are up more than 1.65% this year and recently decreased -0.94% or -$1.58 to settle at $166.79. Ashland Global Holdings Inc. (NYSE:ASH), on the other hand, is down -0.86% year to date as of 02/01/2018. It currently trades at $70.59 and has returned -6.76% during the past week.

Air Products and Chemicals, Inc. (NYSE:APD) and Ashland Global Holdings Inc. (NYSE:ASH) are the two most active stocks in the Chemicals – Major Diversified industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

Growth

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect APD to grow earnings at a 4.38% annual rate over the next 5 years. Comparatively, ASH is expected to grow at a 22.33% annual rate. All else equal, ASH’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 17.28% for Ashland Global Holdings Inc. (ASH). APD’s ROI is 8.30% while ASH has a ROI of 2.10%. The interpretation is that APD’s business generates a higher return on investment than ASH’s.

Cash Flow 




The amount of free cash flow available to investors is ultimately what determines the value of a stock. APD’s free cash flow (“FCF”) per share for the trailing twelve months was +0.45. Comparatively, ASH’s free cash flow per share was +0.85. On a percent-of-sales basis, APD’s free cash flow was 1.2% while ASH converted 1.62% of its revenues into cash flow. This means that, for a given level of sales, ASH is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. APD has a current ratio of 2.90 compared to 2.00 for ASH. This means that APD can more easily cover its most immediate liabilities over the next twelve months. APD’s debt-to-equity ratio is 0.34 versus a D/E of 0.83 for ASH. ASH is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

APD trades at a forward P/E of 21.57, a P/B of 3.57, and a P/S of 4.57, compared to a forward P/E of 18.10, a P/B of 1.28, and a P/S of 1.41 for ASH. APD is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. APD is currently priced at a -5.77% to its one-year price target of 177.00. Comparatively, ASH is -7.25% relative to its price target of 76.11. This suggests that ASH is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.10 for APD and 2.00 for ASH, which implies that analysts are more bullish on the outlook for APD.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. APD has a beta of 1.26 and ASH’s beta is 1.17. ASH’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. APD has a short ratio of 2.37 compared to a short interest of 2.80 for ASH. This implies that the market is currently less bearish on the outlook for APD.

Summary

Ashland Global Holdings Inc. (NYSE:ASH) beats Air Products and Chemicals, Inc. (NYSE:APD) on a total of 9 of the 14 factors compared between the two stocks. ASH is more profitable, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, ASH is the cheaper of the two stocks on an earnings, book value and sales basis, ASH is more undervalued relative to its price target. Finally, MO has better sentiment signals based on short interest.

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