Morningstar | After a Fresh Look at Air Liquide, We Maintain Our EUR 108 FVE and Narrow Moat Rating
After taking a fresh look at Air Liquide, we are maintaining our EUR 108 fair value estimate and narrow moat rating. Air Liquide has consistently earned returns in excess of its cost of capital throughout the last decade, and we think the company’s narrow moat will put it in a position to keep delivering attractive returns on invested capital. Additionally, we expect the company to benefit from strong cost and revenue synergies from its 2016 acquisition of Airgas. We believe Air Liquide is currently fairly valued.Air Liquide is the second-largest industrial gas producer in the world and benefits from being one of the leaders in a sector that we view as inherently moaty because of high switching costs. The company’s narrow moat rests on the strength of its merchant and on-site segments, which account for roughly two thirds of its total revenue and benefit from long-term customer contracts (typically three- to seven-year contracts in the merchant segment and 10- to 20-year contracts in the on-site segment).
Furthermore, cumulative operating efficiency savings from the Airgas merger have already reached $273 million, and management now expects to hit its original $300 million target at the beginning of 2019, a full year ahead of schedule. The cost and revenue synergies are primarily due to vertical integration, site closures, elimination of redundancies, and cross-selling opportunities. We project that these synergies will help Air Liquide improve its operating margin from 16.5% in 2017 to roughly 20% by 2020.
L'Air Liquide is engaged in the market of gases for industry, health and the environment. Oxygen, nitrogen, hydrogen, and rare gases make up Co.'s core activities. Co. structures its activities in three segments: Gas and Services, Engineering and Technology, and Other activities. The Gas and Services segment comprises four business lines: Industrial Merchant, Large Industries, Healthcare and Electronics; Engineering and Technology designs, develops and builds industrial gas production plants for Co. and third parties; and the Other Activities segment develops welding and cutting edge technologies, and markets deep-sea diving and swimming equipment to professionals and privates individuals.
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