APD (APD, Financial) continues to deliver strong results for its shareholders. On July 27, 2017, the company reported that Fiscal Q3 earnings per share grew 15%, driven by 8% revenue growth from increased volumes and 90 basis points of underlying margin expansion. Revenue growth was driven by organic growth and contributions from new plants coming on stream. Margin performance reflects continued operating efficiencies. Management has stated that they “have more work to do on productivity” and that “they continue to see productivity opportunities.” Equipment sales, which are more episodic, added to APD’s strong performance.
While foreign currency headwinds have been a material drag on APD’s results in recent years, we expect this dynamic will start to become a modest tailwind assuming that rates stay at current levels. A modest global recovery in industrial activity is another positive factor that we expect will fuel further growth.
In addition to the organic growth APD has achieved, the company continues to bring on stream growth capex projects, including large facilities in India and China, which are producing results. Growth capex continues to drive meaningful increases in cash flow despite significantly reduced capex budgets as new projects benefit from the capable underwriting of CEO Seifi Ghasemi and his team.
One of the largest catalysts for APD’s further value creation remains the use of the company’s excess capital. The company currently has approximately $5 billion of investment capital, comprised of cash and leverage capacity. Management expects this amount to grow to $8 billion over the coming three years, as the company generates annual cash flow of approximately $1 billion before growth capex and after dividends. On the recent call, CEO Seifi Ghasemi reiterated that the company will be disciplined in deploying this cash in value-generating projects.
We reduced our position in Air Products during the quarter for portfolio management reasons.
From Bill Ackman (Trades, Portfolio)'s second quarter 2017 shareholder letter.
