Billionaire Bill Ackman’s Next Trick: Air Products & Chemicals, Inc. (APD)

It has been a tough year for two of billionaire Bill Ackman of Pershing Square’s most highly touted picks. Herbalife, which Ackman gave a long public short presentation on last December, has recovered from the resulting fall in the stock price and is up 86% year to date (though the stock has underperformed the S&P 500 over the last year). J.C. Penney, a Pershing Square long as the fund attempted to turn around the struggling department store, is down 22% so far in 2013. See more of Ackman’s stock picks.

Now Ackman has announced a nearly 10% stake in Air Products & Chemicals, Inc. (NYSE:APD), meaning that his fund has about $2 billion invested in the industrial materials company- apparently the largest position in Pershing Square’s history. The stock rose about 3% on the news. Reports are that Ackman and his team believe that Air Products & Chemicals can improve operations, and will work with management rather than push to break up the company.

The third quarter of Air Products & Chemicals, Inc. (NYSE:APD)’s fiscal year ended in June, with the company experiencing a 9% increase in revenue versus a year earlier. Because of increases in COGS and SGA expenses, however, net income declined even if we account for a positive special item in the prior year period. Cash flow from operations has been down so far in this fiscal year, and has been slightly lower than capital expenditures.

At its current market capitalization of $23 billion, the stock trades at 23 times its trailing earnings. Considering the business’s inability to control costs as sales grow, that would generally be taken as a high earnings multiple. Ackman’s references to improving operations may suggest that Pershing Square has identified ways for the company to hold down cost growth; if Air Products & Chemicals, Inc. (NYSE:APD) could continue to grow sales nicely and preserve its margins, then the current valuation might make more sense (though it would still not seem like a slam-dunk buy from a value perspective).

According to the database of quarterly 13F filings which we use to develop investment strategies (for example, the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year), Pershing Square had not owned any stock in Air Products & Chemicals, Inc. (NYSE:APD) as of the end of March. Greenhaven Associates, a value fund managed by Edgar Wachenheim, reported a position of 3.8 million shares at the end of Q1 (find Wachenheim’s favorite stocks).