Lansdowne Partners’ Big Bet Against Air Liquide [ANALYSIS]

Lansdowne Partners’ Big Bet Against Air Liquide [ANALYSIS]

A couple of days ago we broke the news about Lansdowne Partners’ big short in Air Liquide (PINK:AIQUY) (EPA:AI), the size of the position is 0.62 percent of  Air Liquide’s outstanding shares. The position does not seem big for a hedge fund with $11 billion in assets under management.  However, we peruse short disclosures every day, and note that it is unusual to see a hedge fund betting against such a large company.

Air Liquide (PINK:AIQUY) (EPA:AI), Lansdowne’s short bet, has a market cap of almost 30 billion euros which is roughly $39 billion, as of now Lansdowne’s short is worth 0.62 percent of outstanding shares, or $240 million. However, when the position was disclosed initially on March 7, it was 0.51 percent of the float. Additionally, Air Liquide (PINK:AIQUY) (EPA:AI) has gained 1.5 percent from March 7 to date. Its possible that the hedge fund is increasing its short position. A spokesperson for the hedge fund did not return a request for comment.

Lansdowne Partners

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Lansdowne Partners is among the largest of European funds; in 2012 it ranked 11th in Europe’s 50 Largest List compiled by The Hedge Fund Journal. As for the performance of Lansdowne, it has been doing great. Lansdowne’s flagship Lansdowne Developed Markets Fund was up 7.75 percent as of March 8 (up 17.8 percent in 2012). Lansdowne European Equity was up 9 percent through March 8, ranking among the top gaining hedge funds of 2013 so far according to data from HSBC’s hedge weekly.

Air Liquide’s business is in the provision of gases to the industrial and medical sector. The company ranks on  the CAC 40 (INDEXEURO:PX1), Paris’ benchmark index that follows the 40 largest companies in France. Air Liquide (PINK:AIQUY) (EPA:AI) has held onto its position as the largest industrial gas company by sales globally, shared with Linde AG (PINK:LNAGF) (ETR:LIN) (FRA:LIN). In addition to Linde AG, Air Liquide’s competitors include,  U.S.-based Air Products & Chemicals, Inc. (NYSE:APD) and Praxair, Inc. (NYSE:PX).

Air Liquide’s earnings for FY2012 showed increased sales in the American regions and China, however revenues fell in Japan and Southern Europe. Earnings per share have risen 6 percent year-over-year, while sales rose to 15.3 billion euros while EBIT was €2.56 billion which was a 6 percent increase and was above analyst estimates.

Air Liquide EPS Estimates
Air Liquide EPS Estimates: Citigroup

Recently the company received an upgrade in rating from BNP Paribas; the firm now rates the stock at Outperform. The ‘Add’ rating of Air Liquide (PINK:AIQUY) (EPA:AI) was reaffirmed by Alpha Value and Commerzbank Corporates & Markets in the past few weeks. However, Citigroup’s Andrew Benson and Dominik Frauendienst reiterated their Hold rating in a note sent in February.

For 2013, the company has strong hopes to expand it Asian markets and is also seeking to achieve cost restructurings to reduce expenditures. Citi’s analysis explained that most of the growth in EBIT achieved in the last fiscal year was due to forex changes rather than the actual strength of the business. The base business of the company is expected to decline in this year as well. Citi also notes that any growth that the company achieves is likely already priced in, plus its business difficulties in Southern Europe.

The short does not seem to be a sector bet. Lansdowne’s decision to short the company is possibly based on Air Liquide’s ability to increase revenues and reclaim its standing in Europe. Therefore in summation, the primary headwind to the company’s future is its revenue generating capacity in Europe, which accounts for almost 50 percent of the net sales; France alone accounts for more than 20 percent.

In recent years, Air Liquide has been expanding its business in both South and North America and emerging Asian economies. Recently the company said that the cheap shale gas in America and changing demand from China has forced the company to change its objectives; Air Liquide’s future strongly depends on how it handles these challenges.

Future earnings guidance will be released in December, 2013, where the company will disclose if it will stick to its initial goal of boosting revenues from 8 to 10 percent on average till 2015. Lansdowne’s short could generate profits in the event that Air Liquide finds the changing markets too challenging and revises down its own sales estimates.

On relative valuation basis, the Company’s expected EPS growth is already priced in the market and given the slow global economy there are risks that the Company may not be able to achieve its growth targets, especially as the  Euro crisis continues to unfold.

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