Bill Ackman (Trades, Portfolio) has one of the best investing track records in the world. He is known for his activist approach. He buys the common stocks of public companies, and pushes for changes so that the market can realize the values of the companies. Ackman buys stocks trading at a discount, and sells when the companies reach their appraised value.
Air Products and Chemicals (APD, Financial) is one of his top holdings. As of December 31, 2014 he was holding 20,549,076 shares of the company. Air Products has a portfolio of products that include atmospheric gases, process and specialty gases, performance materials, equipment, and services. One of the key bullish arguments for Air Products is the company's margin expansion potential. Air Products used to have an operating margin of around 13% when Bill Ackman (Trades, Portfolio) initiated his position. His key argument was that with a right management and processes in place, the company can post margins in line with its peer Praxair (PX). Praxair posted operating margin of 22% in FY2013 which was 900 bps higher than Air Products during the same period. This means if Bill Ackman (Trades, Portfolio)'s argument is true, there is a substantial margin upside for the company.
The company agreed to Bill Ackman (Trades, Portfolio)'s suggestion on change of management and Seifollah Ghasemi was appointed as the new CEO of Air Products. Things have started improving at the company under the new CEO's tenure. The company delivered a strong performance in the first quarter of fiscal year 2015.
The company materially improved its safety record and improved its lost-time injury rate by 42%. This is a clear indication that the employees are actually involved now in improving the discipline of operations and distribution. The company increased its EBITDA margins by 240 basis points and earnings per share for the quarter increased 16% versus last year. Going forward, the company remains focussed on becoming the safest and most profitable industrial gas company in the world.
Management is also focussed on creating value for its shareholders, cash generation, capital allocation and moving towards a decentralized organization. In September 2014, the company laid out a detailed strategic plan to move forward. The plan included five key points:
- Focus on the core business
- Restructure the organization
- Change the company culture
- Control Capital/Costs
- Align Rewards
The company had made progress on all these fronts. The company is now totally focused on improving and growing its core Industrial Gases business. Management has restructured the company and Air Products is operating under new structure. The new structure is designed to create a simple empowered and accountable organization. The company is also making progress in implementing a culture of total focus on safety, simplicity and speed of execution. On the capital allocation front, the company has started examining all projects over $3 million on a weekly basis with full participation of its relevant executives. The company also has made significant changes to align reward to its compensation plans. The new plan encourages focus on EBITDA and cash generation.
In addition to turnaround gaining traction, share purchase by the company's new CEO - Seifollah Ghasemi - also makes me bullish on the company. He has purchased 115,000 shares of the company since he became the CEO with the latest purchase made on February 18. He is the person in charge of turnaround and clearly seems upbeat about the company's prospects.
Air Products is trading at 20.71 times FY2016 (Sept.) earnings estimates. The company's EPS is expected to grow 12.45% in the current year and 12.92% next year. Out of 21 analysts covering the company, six are bullish and have buy recommendations, thirteen have hold ratings and two have sell ratings.
