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We identified Air Products & Chemicals (APD) as a winner for these reasons:
- High quality industrial gas producer
- Customers from diverse set of industries
- Strong balance sheet
- Management with a great record of capital allocation
High quality industrial gas producer
Air Products & Chemicals is one of the leading industrial gas suppliers globally, with operations in 50 countries and 19,000 employees. The company is the largest supplier of hydrogen and helium in the world. It serves clients in several industries, including chemicals, energy, healthcare, metals, and electronics.
Customers from diverse set of industries
Industrial gas companies possess very competitive position within the global supply chain. Products such as industrial gases, which are basically commodities, typically account for a relatively small portion of customers’ costs but are a crucial input to ensure continuous production. This makes consumers of industrial gases willing to pay a premium and enter long-term contracts with reputable distributors to ensure uninterrupted supply. Further, the industry structure makes it inconvenient to switch industrial gas companies, allowing such companies to generate a predictable cash flow stream and lucrative returns. Industrial gases are distributed through three supply modes: on-site, merchant, and packaged. An industrial gas company will build an on-site plant, sell excess capacity through merchant (tanker trucks), and packaged (cylinders and dewars) supply channels. APD generates over 90% of its revenue through on-site plants and merchants, with both those segments holding high switching cost for customers. The company has minimum exposure to packaged gases, which is an advantage because packaged gases are essentially commodities without any switching costs.
Management with a great record of capital allocation
APD has a strong balance sheet and substantial ability to pursue growth by investing in new projects. Management's capital allocation history is commendable, as APD has considerably increased its profitability and enhanced growth through its capital deployment plan in recent years.
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