Lanxess Stands Out When Pricing Power Stocks

| About: Lanxess Ag (LNXSY)

Soaring costs for raw materials threaten the bottom lines especially if companies can't pass along those costs. "If you have to have a prayer session before raising the price by 10%, then you've got a terrible business," Warren Buffett recently said.

But as big a threat as inflation is, rising prices can actually help you sort out the winners from the losers in your porffolio. Buffet described "pricing power" as the single most important factor in evaluating a business.

What you want to look for are shares of strong companies with proprietary products, deep-pocket customers, industry dominance, or brand loyality.

Equities of companies with strong pricing power provide a good bridge between short-term risks and medium-term opportunities.

Abn Amro Private Banking recently came with a list of companies they think have excellent pricing power. The bank identifies Actelion (OTCPK:ALIOY), Allergan (NYSE:AGN), Apple (NASDAQ:AAPL), Caterpillar (NYSE:CAT), Coca-Cola (NYSE:CCE), Gilead Sciences (NASDAQ:GILD), Lanxess (OTC:LNXSY), LVMH (LVMUY.OK), Mosaic (NYSE:MOS), Nestlé (OTCPK:NSRGY), Philip Morris International (NYSE:PM), Procter&Gamble (NYSE:PG), Reckitt Benckiser (OTC:RBGPY), Sanofi (NYSE:SNY), Starbucks (NASDAQ:SBUX) and Swatch (OTCPK:SWGAY). "These companies have the reselience to cope with short-term economic setbacks, as well as the capability to innovate and expand within their sectors in the future," said Mr. Didier Durent, Chief Investment Officer.

One company I particullurly like is Lanxess.

Lanxess is a leader in specialty chemicals and operates in all important global markets. Last year the company, which is listed on the Frankfurt Stock Exchange, achieved sales of EUR 7.1 billion.

With its extensive portfolio, it focuses on premium business. Its core business comprises the development, manufacture and sale of plastics, rubber, specialty chemicals and intermediates. In addition, it supports its customers in developing and implementing made-to-measure system solutions.

Lanxess is a 2005 spin off of Bayer AG (OTCPK:BAYZF), which is intended to divest of all chemicals activitities in favour of Pharma and consumer health activities.

As the global leader in the manufacturing of synthetic rubber, Lanxess can raise prices as raw materials costs rise, especially in the current situation where structural supply constraints exist and inventories with the main tire makers seem too low.

Tire demand is dominated by the replacement market (more than 70% of global demand), making it less dependent on the new care segment. Car tire makers like Michelin, Continental and Goodyear (NYSE:GT) are doing very well right now on increased global car production as well as high demand for trucks especially in emerging markets.

Shortages in supplies for synthetic rubber are structural and new capacities are needed. Most of these are now build by Lanxess, especially in the Far East (Singapore plant ready in 2013).

For more information I would recommend to read the Macquarie Chemicals Conference presentation.

Investment Case

The strong market position as a niche producer and the fact that Lanxess has pricing power in the synthetic rubber business makes this an interesting investment candidate. The fact that the company is benefiting from higher demand for cars and especially the increased use of cars, especially in emerging markets and of course the mining and construction equipment markets.

Results are due on August 11, with consensus now at an EPS of EUR 1.74 per share, for the full year 2011 EUR 6 is expected. The share price trades below a P/E of 10 and gives enough potential for expansion.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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