It has been a tough year for two of billionaire Bill Ackman of Pershing Square’s most highly touted picks. Herbalife, which Ackman gave a long public short presentation on last December, has recovered from the resulting fall in the stock price and is up 86% year to date (though the stock has underperformed the S&P 500 over the last year). J.C. Penney, a Pershing Square long as the fund attempted to turn around the struggling department store, is down 22% so far in 2013. See more of Ackman’s stock picks.
Now Ackman has announced a nearly 10% stake in Air Products & Chemicals, Inc. (NYSE:APD), meaning that his fund has about $2 billion invested in the industrial materials company- apparently the largest position in Pershing Square’s history. The stock rose about 3% on the news. Reports are that Ackman and his team believe that Air Products & Chemicals can improve operations, and will work with management rather than push to break up the company.
At its current market capitalization of $23 billion, the stock trades at 23 times its trailing earnings. Considering the business’s inability to control costs as sales grow, that would generally be taken as a high earnings multiple. Ackman’s references to improving operations may suggest that Pershing Square has identified ways for the company to hold down cost growth; if Air Products & Chemicals, Inc. (NYSE:APD) could continue to grow sales nicely and preserve its margins, then the current valuation might make more sense (though it would still not seem like a slam-dunk buy from a value perspective).
According to the database of quarterly 13F filings which we use to develop investment strategies (for example, the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year), Pershing Square had not owned any stock in Air Products & Chemicals, Inc. (NYSE:APD) as of the end of March. Greenhaven Associates, a value fund managed by Edgar Wachenheim, reported a position of 3.8 million shares at the end of Q1 (find Wachenheim’s favorite stocks).
Airgas, like Air Products & Chemicals, Inc. (NYSE:APD), focuses on manufacturing industrial gases such as nitrogen and oxygen to customers in areas such as manufacturing, medicine, and petrochemicals. It’s apparent that Wall Street analysts expect these two companies to increase their earnings over the next year or so, judging from the lower forward multiple. However, investors probably should not be as optimistic at this point considering the flatter results in recent quarters.
Air Products & Chemicals can also be compared to Praxair, Inc. (NYSE:PX), which provides industrial gases as well as performance coatings. Praxair recorded a modest increase in net income in its most recent quarter compared to the same period in the previous fiscal year, off of a 7% increase in revenue. The stock trades in line with the other two companies discussed here- for example, the trailing P/E is 22. As such markets are pricing in higher earnings growth here as well, and so absent any significant catalysts it does not look like a good value either.
All of this is to say that Air Products & Chemicals, along with the rest of its industry, already has a bit of improvement on the earnings front priced in- and with revenue growth generally low, markets had probably been expecting operations to improve somewhat at these companies. While investors shouldn’t rule out the possibility of Pershing Square being successful here, it does not look like a good pick to follow until Ackman provides specific, credible cost cutting plans and probably not until those plans actually show signs of working.
Disclosure: I own no shares of any stocks mentioned in this article.
