Bill Ackman (Trades, Portfolio) 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) is one of his current activist targets. He currently holds 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 Ackman initiated his position. His key argument was that with a right management and processes in place, the company’s margins can see a meaningful upside.
Last year, the company appointed Seifollah Ghasemi as the new CEO with the aim of improving the company's operating performance and increasing its margins by reducing costs and streamlining processes. Things have started improving at the company under the new CEO's tenure. The company recently delivered a strong second quarter performance with adjusted EPS of $1.55, up 17 percent versus prior year. The company's adjusted EBITDA margin of 29.4% was up 440 basis points versus prior year.
In addition, the company also announced that it has been awarded contract with Saudi Aramco for the world’s largest industrial gas complex which will supply 75,000 metric tons per day (20,000 oxygen and 55,000 nitrogen) to Saudi Aramco’s refinery being built in Jazan, Saudi Arabia for 20 years. Commenting on the win, Air Product's CEO Seifi Ghasemi said:
“We at Air Products are very excited about being awarded this very significant project. We consider it an honor and a privilege to use our proprietary technology to design and build the world’s largest industrial gas complex for an outstanding client and the largest company in the world, Saudi Aramco. We are very pleased that Saudi Aramco trusts Air Products and our partner ACWA Holding to economically and reliably supply the critical gases needed for its refinery in Jazan. This award also demonstrates the value of our outstanding relationship with our partner in ACWA Holding, who has worked so closely with us to develop this great project.”
The company has improved its safety record and improved its lost-time injury rate by 28% since the begining of this year. Going forward, the company remains focused on becoming the safest and most profitable industrial gas company in the world.
Management is also focused 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 focused on improving and growing its core Industrial Gases business. The management has implemented a new structure 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.
Air Products is trading at 20 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.
