APD – A Wise, But Not Long-Term, Compromise
It is evident that APD has struggled to find the right candidate to replace John McGlade as CEO. The search has taken longer than would have been expected – suggesting that multiple candidates were screened/approached.
It is a shame that APD could not find the right younger guy with the time and the willingness to execute the 8-10 year plan that we think is required, but the company has made the right compromise by bringing Seifi Ghasemi into the lead role.
- Seifi has direct experience running an industrial gas business as he lead BOC’s US business in the 90s
- He has been a director of APD for more than 6 months and by now should have a good handle on what needs to be done and what can and cannot be done quickly.
o We should see strategy implementation fairly fast.
- He is very popular with analysts on both sides as he has done a good job with Rockwood.
- He is capable of making the hard decisions that are needed at APD
On the negative side:
- At 69, we doubt whether he plans to say for as long as it will take to fix the bigger problems
o So we quickly get back into the debate around succession
- In our view he is more of a deal maker than an operator – APD needs both, but needs a strong operator more desperately.
The deals will help – if the company can pull of a few asset swap or straight divestments quickly this will likely give investors confidence that the story is moving in the right direction. But again there are some constraints:
- The stock valuation is very high – sales will be dilutive for the most part.
- The company may be in a stronger position to buy, but given past performance with acquisitions we do not think it would sit well with investors.
- A broader company break-up is again impeded by valuation as APD’s multiple is so much higher than the sum of its parts today even with the most aggressive assumption
To justify the price today APD has to grow earnings and grow them quickly and this is why we cannot recommend chasing the stock here. Near-term growth will be very dictated by investment decisions made over the last 2 to 3 years and we are not confident that these are going to generate the returns needed to improve earnings. The company is doing very well in its Chemicals and Engineering business, but very poorly in its core gases business.
A cost cutting initiative would perhaps help, but tensions must already be high within the ranks at APD and a major lay-off today will do little to focus attention on the internal changes that need to be made.
A divestment program – while likely to be small will benefit the asset buyers at least as much, if not more than it benefits APD. We still think that PX and ARG are the better bargains in the US, and the valuation gap between APD and PX has moved back close to an extreme today as shown in the chart.
We see today’s move as a possible reason to support current valuation at APD not a reason for it to move higher. We would still prefer PX.