BASF Not Getting Much Credit For An Upcoming Cyclical Recovery, Nor Its Self-Improvement Initiatives

As well-regarded as BASF (OTCQX:BASFY) is from an operational perspective, it hasn’t done its shareholders all that much good – over the last 10 and 15 years, the annual total return has lagged its peer group by more than 450bp and 150bp, and the gap to the S&P 500 is even larger. That’s even more frustrating considering the efforts management has undertaken to refine the business, buying and selling businesses to shift the mix to a less cyclical, higher-margin specialty weighting.

I believe track records are important, but only to a point. BASF management is going through a cyclical downturn now (exacerbated by COVID-19) and a capex reinvestment cycle, neither of which are great news, but the company is also going through a EUR 2 billion restructuring/self-improvement program, and I believe the share price doesn’t adequately reflect the potential upside to the restructuring and the company’s enhanced leverage to agriculture, EVs, and specialty niches in health, nutrition, coatings, and other segments. If BASF can generate long-term revenue growth around 3% and produce long-term FCF margins only slightly better than historical averages (and a greater skew toward specialty products should help), I believe these shares offer double-digit upside today.

 

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BASF Not Getting Much Credit For An Upcoming Cyclical Recovery, Nor Its Self-Improvement Initiatives