James Zimmerman presented his in-depth investment thesis on Lanxess (Germany: LXS) at Wide-Moat Investing Summit 2017.
Lanxess is a specialty chemicals company based in Germany with an investment-grade (“Ft. Knox”) balance sheet and strong cash generation. The company is undergoing rapid transformation into a specialty chemicals powerhouse, with a group of high-margin, cash-generative, and resilient specialty chemicals businesses, under CEO Matthias Zachert.
Zachert rejoined Lanxess in early 2014. He has a tremendous track record as former CFO of Lanxess from 2004-2011 when adjusted EBITDA grew close to 20% per year. Under a previous CEO, Lanxess had over-expanded into more commodity-oriented specialty rubber segments and become over-leveraged. Zachert rejoined Lanxess as CEO and has aggressively improved the balance sheet and shifted the focus back to stronger specialty chemicals businesses in less competitive niche markets.
Lanxess recently closed a major acquisition of Chemtura, based in the U.S., which makes Lanxess a major player in additive and flame retardant chemicals, alongside Lubrizol (purchased by Berkshire Hathaway in 2011). In fact, Berkshire recently took a 3% stake in Lanxess, and Jim believes Lanxess could eventually be an excellent acquisition for Berkshire.
With a full year of Chemtura, Jim believes Lanxess could generate close to 1.3 billion euros of adjusted EBITDA in 2018 (excluding 50% of its Arlanxeo JV) and trade for 9x adjusted EBITDA. Subtracting an estimated 1.7 billion euros of net debt at yearend 2018 and based on 91 million shares outstanding, Jim believes Lanxess could trade for as much as 110 euros per share (versus the recent price of ~66 euros per share).
About the instructor:
James E. Zimmerman is founder and portfolio manager of Lowell Capital Value Partners, LP, successor fund to Lowell Capital Fund, L.P. Mr. Zimmerman managed Lowell Capital Fund L.P. from 2003 to 2015 employing a proprietary strategy laser-focused on smaller and/or misunderstood companies with large, sustainable free cash flow yields and “Ft. Knox” balance sheets. He generated a compound annual return significantly exceeding the HFRI Equity Hedge Index and the S&P 500 Total Return Index over this period, despite holding a significant net cash position (~30%) for most of this period. He has over 25 years of investment banking and investment management experience in a variety of industries and has been involved with several billion dollars of investments. He has been a member of the invitation-only Value Investors Club for over 10 years, contributing detailed investment write-ups on 35 companies to date which have produced an average return exceeding 50% per investment. He has built an extensive network of relationships with value-oriented investment groups and activists. Mr. Zimmerman graduated with a BA with high honors in economics from Princeton University in 1980 and an MBA from Stanford Business School in 1984. He worked at Drexel Burnham Lambert, Inc., 1984 to 1990, serving in the Corporate Finance Department and multiple other investment banks from 1990 to 2003. He is a close follower of Warren Buffett and his investment approach.
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