Aristotle Capital: Air Products and Chemicals ($APD) Investment Case
Introduction
In their Q1 2025 Value Equity Commentary, Aristotle Capital Management introduces a new investment in Air Products and Chemicals, Inc. ($APD), highlighting it as a compelling opportunity that warranted selling their position in Michelin. The investment reflects Aristotle’s disciplined approach to identifying businesses with strong competitive advantages and long-term value creation potential. Their decision to invest in Air Products comes after careful assessment of the company’s business model, industry position, and recent strategic shifts under new leadership.
Investment Highlight: Air Products and Chemicals, Inc. ($APD)
Business Overview
- Leading global supplier of industrial gases (oxygen, nitrogen, helium, hydrogen)
- Founded in 1940 and headquartered in Pennsylvania
- Serves critical roles across diverse industries including refining, chemicals, metals, electronics, manufacturing, healthcare, and food
- Global leader in hydrogen supply with extensive North American distribution network
Market Position
- Operates in attractive oligopoly industry with high barriers to entry
- Approximately 50% of revenue from onsite delivery with 15-20 year contracts
- Roughly 35% of revenue from merchant gases under five-year contracts
- Remaining business (<15%) from packaged gases delivered in cylinders
Performance Analysis
- Business Model Strengths:
- Long-term contracts with pass-through and take-or-pay provisions ensuring stable cash flows
- Mission-critical products representing small fraction of clients’ costs
- Global scale, network of production facilities and extensive distribution infrastructure
- Engineering expertise creating competitive advantage
- Strategic Refocus:
- Recent leadership change with Eduardo Menezes joining as CEO from competitor Linde
- Divesting non-core assets and exiting projects outside core competencies
- Renewed focus on industrial gases and clean hydrogen aligning with company strengths
Growth Runway
- Megaprojects in Saudi Arabia (NEOM) and Louisiana nearing completion
- Positioned to benefit from increasing demand for clean hydrogen
- Expected significant enhancement in earnings and free cash flow generation
Market Dynamics and Opportunities
- Increasing demand driven by decarbonization policies in Europe and Asia
- Higher proportion of onsite production compared to peers, offering better profitability
- Attractive business model with high switching costs creating customer retention
Valuation and Capital Allocation
- Acquired at attractive discount to Aristotle’s estimate of intrinsic value
- Currently in heavy investment period with large projects underway
- History of steady shareholder returns with 43 consecutive years of dividend growth
- Expected moderation of capital expenditures to 18% of sales in normal environment
Risks
- Recent shift from traditional business model with megaprojects started without offtake agreements
- Delays and rising costs in major projects
- Heavy current investment period impacting short-term financial metrics
Other Key Points
- Activist investor Mantle Ridge took stake in the company advocating for more disciplined capital allocation
- New CEO quickly implementing strategic changes to enhance focus
- Aristotle sold position in Michelin to fund this more compelling opportunity
Aristotle Capital Management views Air Products and Chemicals as an attractive investment with significant potential for long-term value creation, citing its industry leadership position, predictable business model, and compelling catalysts under new leadership as key factors in their investment thesis.
