Investing.com -- Shares of Air Liquide (OTC:AIQUY) fell on Thursday after Morgan Stanley downgraded the stock to "underweight," pointing to concerns about a looming cyclical slowdown in its traditional customer base.

At 8:20 am (1220 GMT), Air Liquide was trading 2.3% lower at €164.58.

The brokerage, which set a price target of €149 per share, cited limited upside potential after the stock’s recent outperformance in European markets.

Morgan Stanley’s analysts acknowledged that Air Liquide has been executing at a high level, delivering on its revised targets and capitalizing on the global energy transition.

“The group is operating at a high-level and the shares have outperformed most defensive European names by 40% since 2019,” the analysts said.

Air Liquide’s wins in energy transition projects and consolidation within the industry have further strenghtened its position. However, the analysts cautioned that sustaining this level of performance may prove difficult in the face of growing challenges.

A key concern highlighted is the potential deceleration in growth from Air Liquide’s traditional customer sectors, including refining, chemicals, and metals.

These industries, vital to Air Liquide’s Large Industries business, are projected to reduce capital expenditure (CapEx) by approximately 1% over the next three years.

This reduction is noteworthy because the company’s growth, especially in new onsite projects, relies on the expansion of its customer base rather than just maintaining existing operations.

Morgan Stanley suggests that the current share price may not fully account for these anticipated challenges, particularly the expected slowdown in capital investments.

Despite the slowdown, Air Liquide has positioned itself as a key player in the energy transition, benefiting from decarbonization projects that could drive long-term growth.

“The traditional customer capex which drives the profitability of Large Industries business is set to slow. The offsetting energy transition will commence in '26,” the analysts said.

This delay could create a gap in growth over the next couple of years, leaving the company more exposed to the cyclical downturn in its traditional markets.

The analysts pointed out that while Air Liquide has announced several new energy-related projects, their contribution to earnings will be delayed, and current valuations are not pricing in this lag.

Another factor weighing on the outlook is Air Liquide’s pricing power in its Industrial Merchant business, which has benefitted from industry consolidation. Over the past few years, the company has enjoyed increased pricing leverage, driving margin expansion.



However, Morgan Stanley now sees limited room for further price increases, suggesting that the pricing cycle has reached its peak. While price degression is not expected, the brokerage anticipates a “potential price ceiling,” signaling that further margin growth may be constrained.

This normalization in profit growth could also leave the company vulnerable to earnings downgrades, particularly as consensus forecasts currently project an optimistic 7.8% EBITDA growth for 2025, which Morgan Stanley sees as a stretch.

Air Liquide’s investment backlog has entered a slower phase. This backlog reflects the total value of approved projects that have yet to commence and is a key driver for the company’s Large Industries business, which caters to major customers in sectors such as refining and chemicals.

Morgan Stanley suggests that the slower pace of new investment decisions could limit future growth, particularly as CapEx from Air Liquide’s traditional customers is expected to flatten. This reflects broader market trends, with industries like petrochemicals, especially in China, pulling back on expansion after a period of over-supply.

One bright spot in the report was the potential for growth in the electronics sector, which is expected to accelerate in 2026 and 2027.

The analysts pointed to onshoring programs in the U.S. and advancements in technology that could drive higher capital investment in the sector.

However, this uptick in electronics-related demand is unlikely to offset the cyclical downturn in Air Liquide’s other core markets in the near term. The outlook for electronics, while positive, is too far into the future to mitigate the immediate challenges posed by the slowing CapEx from traditional industrial customers.

Energy transition remains a critical long-term growth driver for Air Liquide, particularly with its focus on hydrogen production and industrial decarbonization.

The company has secured numerous project wins in recent years, positioning itself to capitalize on the global shift towards cleaner energy.

“We note that while the growth is high throughout the period the more meaningful additions will commence in '27E and beyond,” the analysts said.

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