Recently, one of my
readers sends me a note about Air Products Chemicals (APD) in order to get some
minds from me. Here is his analysis of the situation:
“I’m financial
analyst in Hungary, Europe since 15 years in various multi-nationals like GE
and Citicorp. I got an idea for 3-5 yrs-investment and I would like to know
your opinion about it.
Air Products
is a div. Aristocrat and also in very healthy financial standing (equity,
profit margins, cash level, indebtedness, etc are OK). On the other hand they
are world-leading supplier of H and He. He (Helium) is the key, because it is
limited and disappears when used for the planet forever.
Currently it can be
extracted from natural gas, where the best concentration is int he USA (2%),
and only a few other places are on Earth with much lower concentration (Russia,
Quatar, Algeria etc. around 0,3% only) Nobel laureate Robert Richardson has
proclaimed few years ago that it will be a very rare resource within 25 years
according to present level of usage (needed for various industries like
electronics, medical equipment).
Largest global reserve is in Texas (near to
Amarillo), under public sale according to USA government act, the transaction
is to be finished by 2015. APD is always making acquisitions and it may have
the money to buy the state’s reserve. If it happens, APD will control
Helium-price for a growing need-end market. This is the story. I wonder what do
you think?”
My first thought was that the guy has a very good
taste in asset picking and he is operational deeply involved.
I am a guy who acts more objective. I cannot evaluate
risks from my desk and I don’t like to invest huge amounts of my money into a
single stock. My diversification works in a way that I put only 0.5% – 1% of my net worth
into a single growth stock.
Please, don’t love your investment and make research.
In the end, you will ever oversee the really big risks. You cannot know more than the market.
On a big picture I can tell you that APD is wonderful
growth stock that is also on my watch list. The company is globally diversified
with over 50 percent sales abroad and has a great profitability (+10 percent
net margin). APD is working in a growing industry and creates a really good
work.
But the stock is more cyclic than their competitors. Earnings
decreased by a half during the financial crises. Look at Linde (German) or Air
Liquide (France). Those are two rivals with a lower cyclic business model.
Their yields and valuation levels are in a similar range.
You see that APD is not a monopoly. They cannot raise
prices how they like. That’s the big burden of a commodity trader or volume
producer. Sure, APD is much more but they don’t have patents on their products
like drug manufacturer and they don’t have created a monopolistic situation. In
the long-run, competitors can enter into the market and flood the market with
cheaper gases.
I heard from some companies in the industry that they
are looking for a deeper chain. They try to build an independence from
industrial gases where only the price is the essential point. Linde bought a
healthcare gas company in the United States and produces food gas which helps
to improve the durable time of foods.
The key solution for growth and higher margin is a
deeper value chain and a specialization on customer needs. If your client makes
a gain with your products and they are unique, he will share the profits with
you. The higher the uniqueness of your produces, the higher your margins are.
It could be possible that there are bottlenecks in the
short-run that could boost APD’s earnings but I believe that they are not
available for the long-run because of the unlimited market access for all
competitors. For me is APD a long-term pick because of the leading market
position. I also like Linde and Air Liquide and several other special chemical
and gas stocks. I only own PX and AI for the time being.
Do you have some stock ideas? Let me know and we share
our thoughts.
