Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) disclosed a stake in Germany’s Lanxess AG (FRA:LXS, Financial) on May 19, worth roughly $179.85 million on the date of filing, a small fraction of his $96.5 billion cash hoard.
Buffett bought 2,749,582 shares of Lanxess, a chemicals company, representing a 3.004% stake. The value of the holding ranks it as one of his smaller positions, and makes it only his second foreign company to reach the size threshold for reporting to regulators, along with Sanofi (XPAR:SAN, Financial). Shares of Lanxess jumped 8.3% in Frankfurt trading yesterday when Reuters and Bloomberg first reported the buy. On Tuesday, the stock slid 0.79% on the German exchange to 67.91 euro, or $75.89, per share.
Lanxess’ chemicals are used in an array of everyday and industrial products, such as biodiesel, spare wheels, paint pigments, leather manufacturing, white sugar, red wines and tires. Through a partnership with Saudi Arabian oil company Saudi Aramco, it also produces synthetic rubber.
The company has a 6.2 billion euro market cap, with revenue exceeding $7.6 billion in 2016, though revenue had been in decline for four straight years. On April 21, Lanxess completed the acquisition of U.S. company Chemtura, which produced 1.5 billion euro in annual sales, to stabilize the company, increase profitability and expand its footprint in the growth market of North America.
Chemtura produces flame retardant and lubricant additives, a growth area and “one of the most attractive in the specialty chemicals industry,” Lanxess said in a statement. Lanxess will combine its portfolio with Chemtura’s to create a new Additives business unit, to unite with its Rhein Chemie unit to create a Specialty Additives segment, strengthening its competitiveness in that market. In addition to additives, Chemtura has two other businesses that will attach to Lanxess also, organometallics and urethanes systems.
"Lanxess is committed to value growth. The group's realignment is paying off, we have laid the foundation for further growth and higher profitability. We appreciate when investors confirm our strategic approach with their investment decisions," Antonis Papadourakis, President and CEO of LANXESS Corp., Pittsburgh, Pennsylvania, told GuruFocus.
Buffett’s stake in Chemtura underscores his interest in the chemicals business. In 2011, he acquired Lubrizol, a global specialty chemicals company that makes lubrication additives for the automotive industry. It was the biggest industrial company he added to the Berkshire fleet until Precision Castparts, costing $9 billion, more than Lanxess’ market cap. On April 5, Buffett said in an interview during a visit to Lubrizol that he would “love to have five more” companies like it, but did not mention whether he was considering another in the chemicals space, saying, “I mean, wonderful businesses – they’re not scattered all over the landscape or anything like that.”
Lanxess has increased its profitability since December 2013, when it recorded its first losing year since 2005. In 2016, the company reported $192 million in net income, or $2.10 per diluted share, compared to $167 million, or $1.80 per share, in 2015. It has generated free cash flow in all but two of the past 15 years. As of Dec. 31, the company had $2.59 billion in cash on its balance sheet and $2.67 billion in long-term debt, which decreased to zero by the end of the first quarter.
Lanxess has a price-earnings ratio of 28.47, price-book ratio of 2.37 and will pay Berkshire a dividend of 70 euro cents, or 78 cents U.S., per year in 2017, increased by 17% from 2016.
See Buffett's portfolio here.
