Primarily an investor in U.S. businesses, Warren Buffett (Trades, Portfolio) has shied further from international stocks in recent years, but his investment in Lanxess (XTER:LXS) has proved prescient.
Buffett bought shares of German chemicals company Lanxess on May 19, acquiring 2,749,582 for 3.004% voting rights. Lanxess joined Sanofi (SNY, Financial) as the only two non-U.S. positions that met the size threshold for reporting in his annual letter in 2016. The pair represented a shift from his thinking less than five years ago, when he owned shares of four sizable international companies, including Sanofi: Munich Re (XTER:MUV2, Financial), POSCO (XKRX:058439, Financial) and Tesco (LSE:TSCO).
Having purchased the stock mere months ago, Buffett’s has made limited profit. His approximate gain of 6.3% places his cash profit near $11.33 million. The stock’s movement, though, has placed it in record territory. Trading for $69.51 Wednesday afternoon $70.30 Friday, it hovers close to its all-time high of $70.67 reached in June.
Buffett moved on Lanxess shortly after it closed a major acquisition of Chemtura, a massive company specializing in flame retardant and lubricant additives, which Lanxess formed into its Additives unit. Lanxess operates five segments: advanced intermediaries, specialty additives, engineering materials, performance chemicals and Arlanxeo joint venture for synthetic rubber. Each generates between $1.5 billion and $3 billion euros in sales per year.
Buffett blesses companies he believes will prosper in five years, and Lanxess has a medium-term financial plan it announced in September.
“LANXESS is back on solid footing and has embarked on a profitable growth path,” Matthias Zachert, CEO of Lanxess, said in the statement. “In the coming years, we intend to reach our full potential and transform LANXESS into an even stronger company with a highly balanced and stable platform, increased profitability and, last but not least, a company team-culture based on dedication and motivation.”
Specifically, Lanxess has set an operating margin target of 14-18% by 2021, an increase from 12.9% in 2016. It also wants to diversify, finesse synergies with Chemtura and continue with its launch of a company-wide digitization push.
As for its portfolio, Lanxess said it wanted to enforce strict portfolio management, including only products with a shot at becoming the biggest players in their markets and bulky margins. The company will also strive to improve its return on capital employed to an average of 20% through organic investments from its previous 6.9% return on capital employed of 2016.
In August the company provided its second-quarter financial update, which including a projection for the highest earnings in its history for the full year as it integrates the Chemtura business into its accounting.
Sales in the second quarter jumped to 29.8% from the previous year to 2.52 billion euros, primarily due to the addition of Chemtura and increasing selling prices, as net income slid 96% to $5 million. Earnings per share also plunged 96% to 4 euro cents.
Analysts polled by Vara research expect Lanxess to post 9.6 billion euros in sales for 2017 versus 5.88 billion euros in 2016, along with earnings of $424.5 million, compared to 578.19 million.
See Warren Buffett (Trades, Portfolio)'s international holdings here.
