In case you’ve missed it, the chemicals industry has been decimated in recent years. The stock prices of Dow, Celanese, LyondellBasell, FMC and many others are down by more than 70% from their respective peaks in 2021 or 2022. Even chemicals titan BASF saw its valuation decline by nearly 60% since 2018. One company which seems to have avoided the carnage, however, is Air Products and Chemicals, Inc.
APD stock reached an all-time high of $341 earlier this year. Currently at $257, it has lost just 25%, which is a result most investors in the industry can only dream of. And indeed, the company’s sales, albeit hardly growing, have remained stable, while net income is actually rising. At least on the surface, Air Products and Chemicals appears to have managed the industry’s downcycle quite well. Is the current drop a buying opportunity then? We don’t think so.
First of all, just because the stock hasn’t declined yet, it doesn’t mean that it will not. The weekly chart above reveals that the uptrend since before the year 2000 up to this year’s record is a five-wave impulse. We’ve labeled the pattern I-II-III-IV-V, where three lower degrees of the trend are also visible within wave III. According to the Elliott Wave theory, a three-wave correction follows every impulse.
We think that the decline from $341 is the beginning of a big retracement, which has yet to drag Air Products and Chemicals stock much lower. The 61.8% Fibonacci level near $130 a share looks like a reasonable bearish target in the years ahead. From current levels, that’ll be a roughly 50% plunge before a reliable support can be found.
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But Elliott Wave aside, we would rarely dare making such a negative prediction based solely on a price chart. The thing is that under the surface the company’s fundamentals have been rapidly deteriorating, as well.
While accounting profits continue to look healthy, actual operating cash entering the company has been stagnant for years. What’s worse is that APD’s capital expenditures kept growing to the point where free cash flow turned negative in 2023. The situation has only deteriorated further in the following two years, forcing the company to increasingly rely on borrowed money to fund its operations. Long-term debt is up by nearly $10B in just three years. This is clearly not sustainable, giving us another reason to avoid Air Products and Chemicals stock, in addition to the bearish Elliott Wave outlook.
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