A business that is essential for modern society is a key ingredient in Warren Buffett (Trades, Portfolio)’s success. You will not see Warren buying buggy whip companies. He will, however, buy companies with an “economic moat.” This moat createsstability and growth in sales.
A company that is prone to fashion changes or technological obsolescence is not characteristic of a company with an economic moat. Fashion is not a concern for Airgas Inc. (ARG, Financial), a company that supplies industrial, medical and specialty gasses and hardgoods. It also provides goods and services essential for a modern society to function.
This necessity creates a durability of sales. This durability of sales creates the proper economic conditions for creditors to be paid. Most companies will have set fixed costs. For a company that produces products that are prone to competition it will be difficult to pay off those fixed costs when sales decline. It gets worse if the price charged for your product also declines. As with the buggy whip, this is common for industries like retail and the technology. The chart below exhibits the growth in Airgas Revenue.
For the average investor, Airgas Inc. has produced great returns. The returns are a result of the company providing an essential product in addition to growing organically.
For insiders with large long-term holdings, like Airgas "Brainchild" Peter McCausland, investment returns place him comfortably in the top 1% wealthiest Americans. Below is a 2012 clip of Peter on Mad Money for the seventh time, he is obviously an insider to pay attention to.
Like Peter, courageous investors still holding since the difficult times in the 1990s, when ARG was $2.00/share, are enjoying dividends producing near 100% on their original investment.
As dividends grow, those investing in the early 1990s are reaping the rewards of investing when the crowd was too fearful. Below is a chart that depicts the annual payment of dividends per share.
However, with recent selling, are those insiders that held for so longsignaling it is time to sell? No matter how well their returns have been, it is today’s price that matters. Even if the financial media touts dividend-paying stocks as “safer” than non-dividend-paying stocks, at a certain price it does become dangerous. With a continuous flow of insider selling, a caution flag is being waved.
One reason why insiders sell is because they believe the economic conditions are about to change. Long term insiders know their company financials backwards and forwards. Insiders in the commodity related business also understand the importance of paying attention to long term business cycles. Retail fashions change yearly and during those times profit margins contract. As with a swimming store witnesses low margins every winter, commodity related business have cycles too, just not every year. Could the record high profit margins be similar to how a swimming store has record margins in the summer? Do Airgas insiders see a “winter” season coming?
Thanks to Gurufocus.com for providing the interactive charts.
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