I’m fond of saying that successful turnarounds can significantly exceed investor expectations, but it’s also true that some companies struggle for years to make any real headway with their self-improvement projects and leave investors with little to show for their patience. Such has been the case with Lanxess (OTCPK:LNXSF) (LXSG.DE), where efforts to reshape the business toward more value-added, less-cyclical specialty chemicals have yet to produce the hoped-for benefits.
Lanxess shares have been notable underperformers since my last update on the company, with the shares underperforming the S&P 500 by close to 70% (a 9% loss versus a 62% gain for the S&P 500) and the performance relative to the STOXX Europe 600 index has likewise been pretty lousy (44% underperformance). Simply put, the company hasn’t generated the revenue, profit margins, or free cash flows that were expected, and investors bailed out in favor of more promising names.
Lanxess shares do look modestly undervalued, but that still rests on the assumption that the ongoing shift toward higher-margin businesses, including the pending acquisitions of Emerald Kalama and International Flavors and Fragrances' (NYSE:IFF) microbial control business, will drive sustainably higher margins. That may well be more benefit of the doubt than management has earned, and the shares do trade in line with their historical valuation norms, suggesting that investors are largely expecting more of the same here.
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