Lanxess Has The Pieces In Place, But It's Time To Perform

 

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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Lanxess Has The Pieces In Place, But It's Time To Perform

Lanxess Getting More, But Not All, Of Its Due

Turnarounds take time, and one of the challenges companies in that position have is convincing the Street that it actually will be different this time. To that end, while shares of Germany’s Lanxess (OTCPK:LNXSF) (LXSG.DE) are up more than double from the early 2016 lows, the company has only been recently getting much credit for management’s efforts to transform the business from a highly cyclical, heavily commodity-oriented company to a more stable specialty-oriented chemical company.

With the shares recently breaking out above EUR 70 (or $80), there isn’t huge upside to these shares anymore, but I do believe the shares are about 10% undervalued as the company goes into its next leg of transformation and turnaround. Although 2018 volume growth may be lackluster, top-line disappointments could be a buying opportunity provided the underlying margin performance continues to head in the right direction.

The U.S. ADRs do not have very good liquidity, so I would caution investors to be careful about buying them (use limit orders), and I would suggest that those investors who can buy the local shares should do so.

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Lanxess Getting More, But Not All, Of Its Due