Should You Follow Bill Ackman Into This Materials Giant?

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Bill Ackman needs a winner. This is the conclusion most investors likely came to upon receiving news that the famed hedge fund manager’s Pershing Square Capital Management invested $2.2 billion in materials company Air Products & Chemicals (NYSE: APD).

Ackman has been struggling due to the ongoing Herbalife saga. In light of the fact that his short position in that stock has taken an absolute beating over the past year, it’s abundantly clear that Ackman needs a winner to repair his image. Is Air Products up to the task? And, if so, should you follow Ackman’s lead?

A dividend investor’s dream

Air Products is beloved by value and income investors for its steady profit growth and reliable dividends. Earlier this year, Air Products raised its dividend by 11%, representing the 31st consecutive year of a dividend increase. These aren’t token increases, either: Air Products often provides regular double-digit percentage increases in its distribution, no matter how the overall economy is doing.

Air Products can manage such generous growth in its shareholder payout because of its incredibly sound operations. Air Products has performed admirably in the years since the Great Recession ensued. The company’s sales were flat in 2012 versus the prior year, but are up 22% since 2009.

Diluted earnings per common share clocked in at $5.44 in fiscal 2012, and the company has shown resilience to start 2013. Sales are up more than 8% through the first nine months of the current fiscal year.

All told, Ackman’s fund owns a 9.8% stake in Air Products, making Pershing Square Capital Management the company’s biggest shareholder. He believes Air Products to be considerably undervalued.  The question for Foolish investors is whether he's right.

Should Fools follow his lead?

When I last wrote about Air Products a little over one month ago, I advised investors to consider adding the best-in-breed materials giant to their portfolio, because of its resilient underlying operations and strong commitment to being shareholder-friendly.

In the wake of Ackman’s huge investment, Air Products has rallied considerably. As a result, Air Products is no longer the bargain I considered it to be at $95 per share.

Air Products has rallied to $110 per share on the Pershing Square news. The company expects $5.50 per share in fiscal 2013 earnings, which would represent only modest growth year over year. At its current price, investors are paying 20 times both trailing and forward earnings.

Because of this, Air Products now trades in-line with its closest industry peers, Airgas (NYSE: ARG) and Praxair (NYSE: PX).

Airgas recently released its annual report, which showed that sales increased 4% year over year, with diluted earnings per share growing nearly 9%. However, the company struggled in its fiscal first-quarter, reporting flat sales and diluted EPS.

Airgas guides investors to expect at least $5.00 per share in fiscal 2014 diluted EPS, meaning investors are paying slightly more than 20 times next year’s earnings.

For the most part, Praxair trades in-line with its industry competitors. The company brought in $3 billion in sales in its fiscal second quarter, representing 7% year over year growth. Diluted EPS, meanwhile, rose 5% from the year-ago second quarter.

Going forward, Praxair expects $6.00 in per-share earnings in the upcoming fiscal year. Again, we see a pattern: Praxair trades for 21 times trailing earnings and 20 times forward EPS.

I consider Air Products (and for that matter, rivals Airgas and Praxair as well) to be fairly valued. Investors who already own these stocks will continue to receive solid dividends, along with strong dividend increases every year. Unfortunately, new buyers aren’t getting a great deal on the stock, which is why I’d advise investors to wait for a better price before pulling the trigger.

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Robert Ciura has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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