BASF Analysis - Undervalued monster?
We create chemistry for a sustainable future. Any long-term growth potential?
This is not investment advice for entertainment only. I am not an engineer, and I lack knowledge of chemistry massively.
In my opinion, we need some grit and dirtiness in our portfolios in the next decade. BASF is extremely ugly — my Marty Mcsorley. Grizzled tough and mean, but it comes with high risk. BASF can't be ignored.
Buy low, sell high. No matter what, there will be a "green transition" Our governments said so and have placed massive incentives for companies and implemented a coherent set of climate policies.
I buy when everybody screams 🤡 stupid BASF & Germany. However, there are many significant reasons why this is so hated and underrated, and we will only scratch the surface today in my little snapshot about BASF.
The automotive industry's transformation is powered by one vital component - Lithium.
Lithium is the new oil. Hydrogen is still too complex, costs are crazy high, and is it sustainable? Highly energy intensive. Lithium batteries are far from perfect, but it is still the most viable solution, and many more innovations are yet to come. This is only the beginning.
Northvolt just raised more money and could be valued at 20bn. They are looking for an IPO.
Tesla is the only manufacturer that has put some thought into its supply chains and Lithium availability. (Tesla stock will do good in this "green transition").
Entering mining, possibly buying a miner.
Have good agreements.
Own production in Texas.
Research on refinement.
The biggest problem is not lithium ore itself but the refinement and extraction.
Lithium Refining Is a ‘License to Print Money,’ Musk Says.
The biggest chemistry company in the world may have some part in this.
WFT IS BASF ROLE - Circular Economy and Resource Efficiency
By 2030, we want to double our sales of solutions for the circular economy to €17 billion (baseline: 2020).
→ Products based on renewable or recycled raw materials:
These include products manufactured in whole or in part from renewable resources instead of fossil raw materials.
→ Products that close material cycles (“close the loop”):
Products that enable and improve the recyclability of valuable resources, such as:
Lithium, nickel, cobalt, and manganese from spent lithium-ion batteries
→ Products that increase the resource efficiency or lifespan of materials (“extend the loop”):
These include products that reduce resource consumption and environmental impact along the value chain. One example is Oxsilan®, an innovative thin-film technology for protecting metals from corrosion.
Europe desperately needs this infrastructure, and BASF is leading the way and sucking subsidies. This deglobalization will benefit the most these humongous companies.
It has almost always been the best strategy to find those close to the narrative and not-so-obvious picks. Think 5-10 years ahead; what will be the main hype and narrative? Now it is Lithium and Batteries. What’s next? Recycling? Refining? Innovation in battery chemistry? BASF is a strong player already in the global battery materials market and will grow.
Hated by all the funds? Is nobody talking about BASF or reporting anything?
Does not fit at all into the current clown world ESG narrative.
No hype.
P/E 8 and dividend yield 6%. (Careful, just focusing P/E during these times).
The massive moat in the chemistry industry.
The boring chemistry business prints money no matter what.
Good stock buyback programs. (Okay, now halted after q4 results).
Free call option to “green transition” I like these bets, so what if their plans to become number 1 in this battery ecosystem in Europe fail? Well, I did not get the ten-bagger I wanted but did not lose -97% to FOMO, some new battery innovation IPO.
They play a part in “green transition” since they are the most significant player in chemistry, not just batteries. Hydrogen? What else?
They also benefit massively from ongoing money printing and subsidies, for example.
I wondered why BASF stock was doing so well from summer lows in 2022, +25%. February 24th after results BASF -8%. This was already well-known development that result would tank. Everything sounds so far too good to be true?
The big risk
BASF and the whole Germany bet big on Russia, and their significant competitive advantage was cheap gas. BASF & Germany benefitted greatly.
Now they bet big in China 10bn site. What could go wrong? On the other hand, they also have to bet on China. Not to have any presence in the most significant growth market?
Still a massive risk. How about USA and China trade wars intensifying - China becomes uninvestable? Already happened in advanced semiconductors. The current administration does not care about Germany (what happened to Nord stream pipes?)
Very hard to invest in China if you are a retail investor, but hey, with this kind of proxy, you can get some exposure.
Also, they are staying in Europe and continuing to invest worldwide.
BASF investments: (Source)
2022
2023 - 2027
Risks 2023
How BASF sees risks for 2023: (From management report page 157)
General economic uncertainty will remain exceptionally high.
A further escalation of geopolitical conflicts, for example, in China.
Weaker growth in China.
There is considerable uncertainty surrounding consumers.
European gas price developments.
Will be weak years ahead.
Bottom line
BASF is by no means a perfect investment, hence the Marty Mcsorley reference. However, it is still too good to be ignored:
+150 years of history. Solid earnings and dividend history.
Survives no matter what's ahead.
Good moat, the world leader in chemistry.
Good pricing power.
Long-term growth potential.
With battery & sustainability initiative.
Grizzled tough and mean it is BASF's job to keep my portfolio somewhat safe. If not, I will ruthlessly cut it and find another one. However, I have high trust; BASF has an excellent track record and a high probability of surviving this messy century ahead.
Definitely keeping my eyes out and waiting for a price starting with 3X,00. We want our enforcer to be as cheap as possible and hold it long term.
What are your out-of-favor stock picks during these highly uncertain times? Share ideas below and comment!
Sources:
https://nationalinterest.org/feature/germany%E2%80%99s-bet-china-crisis-making-206118
https://report.basf.com/2022/en/_assets/downloads/entire-basf-ar22.pdf