Why Bill Ackman Could Boost This Stock By 35%

One of the big opportunities lies in Air Products’ balance sheet. The company has a debt-to-equity ratio that’s nearly half of Airgas’ and Praxair’s, and its leverage ratio is at least 80% of either peer.

With this less levered balance sheet, Ackman could push the company to recapitalize and make share repurchases or pay a special dividend. Ackman could also push the company to make acquisitions.

Air Products made a play for Airgas in 2010, but eventually abandoned its efforts. Ackman could push for a marriage of the two, which would allow Air Products to better compete with Praxair. Praxair has a market cap that’s 50% greater than Air Products and nearly five times that of Airgas. But together, Air Products and Airgas’ revenues would surpass Praxair’s by 30%.

Assuming that Ackman “does his thing,” whether it be optimizing operational efficiencies or leveraging the balance sheet, the plan is to bring Air Products’ returns more in line with peers. Assuming Ackman gets Air Products’ ROE up to 20% with share repurchases and modest operational improvements, the stock could easily see $145 over the next 12 months.

Risks to consider: As with any activist investment, there is the risk that the activist announces plans for increasing shareholder value, the stock moves up quickly in a short time period, but plans fail to materialize and the stock tumbles. Air Products also has a poison pill in place that prevents Ackman from buying more than 10% of the company without having board approval.

Action to take –> When activists get involved in a company, the stock tends to see an initial run, but they also tend to outperform the broader market over the following years. Investors haven’t seen the initial pop in Air Products stock, but once Ackman lays out his plans, the stock could move higher.

P.S. Air Products is one of those companies that are fundamental to broad economic success. It reminds us a lot of what we call “forever” stocks. “Forever” stocks can be bought, forgotten about and held — forever. To learn more about these stocks — including some of their names and ticker symbols — click here.

– Marshall Hargrave