Airgas - Bonds Attractive at Current Levels

Airgas (Baa3/BBB) announced earnings this morning that were pretty much in line with expectations. EPS, excluding items, came in at $0.83 on sales of $1.06 billion. That beat estimates on EPS by a penny and hit revenue right on the nose.  Looking at the credit metrics, the company appears solid for their credit rating and the numbers were decent.

ARG 15s have COC language, which is helpful if the notes cease to be rated Investment Grade by each of the Rating Agencies, but as APDs ratings are A3/A and unlikely yo go below investment grade in the event of a takeover, we will, for the time being, ignore the covenant.  The bonds currently trace at $101.369 to yield 2.944% or +175/5yr.  At these levels, the bonds are attractive as downside is traveling to APD where the 13s currently trade +85.  Given the current trading levels, I would overweight the name as spreads could go tighter once an outcome is known.

ARG 3.25% 10/15 (Baa3/BBB)  +175/5yr
PX 3.25% 9/15 (A2/A)  +55/5yr
APD 4.15% 02/13 (A3/A) +85/3yr



Relevant Numbers:

• Sales up 10% YOY to $1,061MM;
• Same store sales +9%
• Operating income up 10.9% YOY to $121.8MM;
• SD&A was 37% of sales (vs 38% 9/09), reducing the margin by 100bps;
• Cost of products sol was up 12% YOY;
• Company just replaced D&A during the 6 month period;
  
• Debt up 11% vs YE 3/10.  Adjusted for trade recv, debt was down 7%;
• Adjusted Cash from Operations fell 16% from 6mo end 9/09 to $290MM
• Free Cash Flow was $133MM for 6mo ending 9/10 (down 24% from same period '09);
• Adjusted Debt to Capitalization is 41.7%, down from 45.6% at 3/31/10.
  

Company Guidance:

“Given our strong performance and expectations for steady growth, we raised our fiscal 2011 guidance, which now represents a year-over-year increase of 24% to 28% in underlying earnings before SAP costs,”.  As stated earlier, guidance is in-line with estimates.


Market Impact:

• ARG 15s haven't traced since 10/25, at which time they were down approximately 1/2 point from earlier prints.  ARG 13s are wider on the day.
• Equity is currently trading at $70.80 +1% on the day.  (at 28x P/E, which is about 9 higher than APD or PX and a forward P/E of 21x - quite frankly, I don't see their argument for APD's offer grossly undervaluing the company unless they are expecting significant margin expansion).