Disclaimer: This is not investment advice. PLEASE DO YOUR OWN RESEARCH !!!
As always with my more detailed writeups, I will focus on the general sections in the post and attach the full pdf for anyone interested in the details. And of course the Bonus Sound Track.
- Elevator Pitch
Fuchs SE is a 4,5 bn EUR market cap, family owned and run Lubricant manufacturing and distribution company that had been a super star performer until 2013/2014. Since then, the stock traded more or less sideways and had to fight some margin compression. Since early 2023 however, Fuchs seems to be back on a growth and margin expansion path.
This very well managed company earns double digit EBIT margins and Returns on capital of >20%.The valuation is very moderate with 13,5x 2024 or 12x 2025 earnings for this very boring but high quality small cap company. Based on company projections, EPS should grow organically by ~9% plus any additional effects from share buy backs and M&A over the next 4-6 years and the current dividend of around 3,5%.
2. Introduction
I have been owning Fuchs shares in the past, before starting to write the blog. I sold them much too early and have been watching them for quite some time. So far, I didn’t invest because the valuation was always quite rich and the momentum in the business was not great. Now however, I think it seems to be a good time to dive in again. I can also recommend Augustusville’s write-up from 2022 as a starting point.
Interestingly, Warren Buffett in 2011 did one of his largest industrial acquisitions with Lubrizol which has a relatively similar business model (Lubruzol manufactures mainly the additives). In a 2016 letter from Lubrizol, Buffet was quoted as follows:
“In an April town hall with Lubrizol employees in Ohio, Buffett said that Lubrizol was an important part of Berkshire’s portfolio.“Lubrizol was our largest industrial operation up until the [2016] acquisition of Precision Castparts,” Buffett told employees. “And it’s a terrific business. It’s big and I hope it gets bigger. I’d love to have five more [like Lubri-
zol], but they’re very hard to find. Wonderful businesses are not scattered all over the landscape and they take decades to build”
9. Pro’s and Con’s
As always, now it’s time to look at a quick list of pro’s and con’s for this case:
+ Family controlled, family run (for some more years)
+ Decent margins, good Returns on capital
+ Rock solid balance sheet
+ good reporting /IR presentation
+ share buy backs, good capital allocation
+ insider buys CEO
+ decent valuation
+ margin increases in 2023 and 2024
+ mean reversion potential both, valuation and margin wise
+ decentralized, entrepreneurial culture
+/- relatively large China exposure (15% of sales)
+/- still mainly in Europe
- margin erosion from 2014 to 2022
- Auto/ICE exposure (45%)
- CEO will retire in a few years (aged 56)
10. Conclusion & Game plan
In a nutshell, I found many things that I like at Fuchs. It is a very good business run by very capable people. The valuation is “moderate”, the expected return based on the company projection is very attractive considering the risks.
Therefore I decided to allocate 4% of the portfolio at around 30,80 EUR/share into the common shares which trade at a Discount of 20% to the more liquid prefs.
The game plan is for the time being to sit and wai. Unless Fuchs drastically adjusts its 2025 target or lowers the long term EBIT target, I think this is one to just let rn for a few years.
Once Stefan Fuchs officially passes the CEO function to his successor, I will need to take a deeper look at it again.
Bonus Soundtrack: Smooth Operator
I have thought about which song fits best to Fuchs and ended up with this one. Once you use Fuchs products, everything should operate really smoothly….
Sade – Smooth Operator – Official – 1984
One of my all time favorite songs, ideal to listen to and sip a fine Negroni Sour.
