Morgan Stanley resumes Air Products stock with Equalweight rating

Morgan Stanley initiated coverage on Air Products & Chemicals (APD) with an Equalweight rating and a $290 price target, citing positive momentum under new leadership but emphasizing that significant outperformance hinges on ROIC improvements, which are uncertain and time-consuming. This assessment comes as APD reported weaker-than-expected Q2 2025 results, leading TD Cowen to lower its price target and Moody's to revise its outlook to negative due to free cash flow concerns, despite the company's plans for workforce reductions and a focus on long-term EPS growth.

Analysis

Morgan Stanley has resumed coverage on Air Products & Chemicals Inc. (NYSE:APD) with an Equalweight rating and a $290.00 price target, reflecting a cautious optimism. While acknowledging positive momentum under new leadership, the firm underscores that significant stock outperformance is contingent upon improvements in return on invested capital (ROIC), a process deemed both time-consuming and fraught with risk. This assessment aligns with recent company performance, as APD reported Q2 2025 adjusted EPS of $2.69, missing the forecasted $2.75-$2.85, and revenue of $2.92 billion, slightly below the anticipated $2.94 billion. Consequently, APD has revised its fiscal year 2025 EPS guidance midpoint downward by 7% to $12.00. Further compounding concerns, Moody's Ratings has shifted APD's outlook from stable to negative, citing potential difficulties in maintaining credit metrics due to negative free cash flow projected for 2025. In response, Air Products plans to reduce its workforce by approximately 11% by fiscal years 2027-2028, aiming for free cash flow breakeven by FY27 and targeting high single-digit EPS growth from 2026 to 2029. Despite these challenges and InvestingPro data showing 13 analysts recently revising earnings expectations downward, TD Cowen maintained a Buy rating but lowered its price target to $315 from $325, indicating some confidence in APD's strategic shifts. The company's current market capitalization stands at $60.48 billion, and it has a 55-year history of consistent dividend payments, though its InvestingPro Financial Health Score is a modest "FAIR" 2.36.

Key Decisions for Investors

• Investors should closely monitor Air Products' progress towards improving its Return on Invested Capital and achieving its free cash flow breakeven target by FY27, as these are critical for potential multiple expansion and stock outperformance.
• Given the recent earnings miss, lowered full-year guidance, Moody's negative outlook, and Morgan Stanley's Equalweight rating, a cautious stance is warranted despite positive new leadership and long-term growth ambitions.
• Consider the execution risks associated with the planned workforce reduction and strategic shifts, weighing them against the potential for improved financial health and the company's long track record of dividend payments before adjusting positions.