Blowing hot air? Why Ackman favors Air Products & Chemicals

Market Realist

Analyzing Pershing Square's positions in 3Q 2013 (Part 3 of 6)

(Continued from Part 2)

Pershing Square Capital Management is a New York–based activist hedge fund founded and run by Bill Ackman. Ackman started the firm in 2004 with $54 million from his personal funds and from his former business partner, Leucadia National. News reports in October claimed that the fund has seen its assets under management decline by $1.2 billion from $12.4 billion in March, mainly due to setbacks in investments made in J.C. Penney Co. (JCP) and a large bet against Herbalife Ltd. (HLF).

In this six part series, we’ll go through some of the main positions Pershing Square Capital Management LP traded this past quarter.

The fund bought no new positions in 3Q 2013. It added to its positions in Air Products & Chemicals (APD), and reduced its positions in General Growth Properties, (GGP) Canadian Pacific Railway (CP), and Procter & Gamble (PG). It sold its positions in J.C. Penney (JCP).

Abbreviated financial summaries and metrics for these securities are included below. Detailed analysis and recommendations require a subscription (more information at the bottom of the article).

Why buy Air Products & Chemicals Inc. (APD)?

Pershing Square increased its position in Air Products & Chemicals Inc. to 21.3% in 3Q 2013. It purchased an 8.44% stake in 2Q 2013. The July filing stated that the stock was undervalued, an attractive investment, and that it intends to engage in discussions with management, the board of directors, other stockholders, and other people who may relate to governance and the board composition, management, operations, business, assets, capitalization, financial condition, strategic plans, and the company’s future. The company had adoped a poison pill plan a week before Pershing Square disclosed the investment. In September, Air Products announced the retirement of CEO John E. McGlade in 2014 and the addition of three new independent directors to its board.

In October 2013, the company announced its 4Q 2013 and full-year 2013 results. Fourth quarter revenues of $2,587 million decreased 1% versus the prior year on 2% lower base volumes, and a -2% impact due to the previously announced decision to exit the Polyurethane Intermediates (PUI) business. Higher-energy pass-through and positive currency impacts partially offset the lower volumes. Sequentially, overall sales increased 2%, with underlying sales up 3% on higher volumes across all business segments. For fiscal 2013, sales of $10,180 million increased 6% versus the prior year, with acquisitions contributing 5% and higher energy pass-through contributing 2%, partially offset by 1% lower volumes driven by the PUI business exit.

The company claims it delivered on its key priorities and produced strong returns for shareholders, reflecting its continued focus on cost reduction, productivity improvements, and disciplined project execution. Despite a weak economy, its volumes improved and its productivity initiatives more than offset inflation. It increased the dividend by 11% and bought back 5.7 million shares during the year at an average price of just under $81 or a 24% discount to its year-end closing price. In November, the company declared a quarterly dividend of $0.71 per share of common stock.

Air Products & Chemicals supplies industrial gases, performance materials, equipment, and technology. It’s the world’s largest supplier of hydrogen and helium and it has built global supply positions in growth markets like semiconductor materials, refinery hydrogen, coal gasification, natural gas liquefaction, and advanced coatings and adhesives.

APD

Pershing Square Capital uses fundamental analysis with a value orientation employing extensive research and thorough due diligence in its decision-making process. It uses a unique mix of value investing and an activist approach in sifting through and identifying investments.

Founder Bill Ackman has a Bachelor of Arts degree magna cum laude from Harvard College in 1988 and an MBA from Harvard Business School in 1992.

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