Warren Buffett captured headlines when it was revealed that Berkshire Hathaway (BRK.A 0.16%)(BRK.B 0.11%) made a multi-billion dollar investment in top chip foundry company Taiwan Semiconductor Manufacturing (TSM +1.97%). Many investors have been excited about the move, and are looking to follow Buffett's lead.
But maybe that's not such a great idea. Apple (AAPL +2.65%) makes up over more thanof Buffett's stock portfolio, and is a top customer of Taiwan Semi. Perhaps Buffett is simply hedging his Apple bet, especially since Taiwan Semi just passed big chipmaking price increases on to customers like Apple.
Nevertheless, a huge surge in chip manufacturing is shaping up around the globe, including here in the U.S. Rather than investing in Taiwan Semi stock, give Air Products & Chemicals (APD 1.83%) a serious look first.
A hidden gem amid mountains of silicon?
Air Products is not a chip manufacturer, nor is it a supplier of any key ingredients in chips like silicon. Rather, the company specializes in industrial gasses, liquified natural gas, and related equipment needed for manufacturing infrastructure. Chip fabrication is a mind-bogglingly complex process. Many chip fabs are customers of Air Products as they tap the company for gasses and energy to power massive fab facilities and manage a complex global supply chain.
As pointed out in Air Products' earnings presentations this year, Taiwan Semi (which commands over half of the world's chip fab market share) is likely an Air Products customer. Taiwan Semi is trying to localize the production of some of its neon gas (an ingredient in chipmaking). Global supply of neon has come to a grinding halt since Russia's invasion of what was once the world's top producer of the rare gas, Ukraine.
Thus, while Air Products isn't a pure play on chip manufacturing, it could be a great way to get some chip and technology supply chain exposure in your portfolio.
The U.S. and other countries around the world are prioritizing domestic technology (for example with the U.S. CHIPS Act, legislation that will kick in some $52 billion in chip manufacturing and research in the U.S.), and Air Products could have a lot to gain. New facilities being built means more gasses, energy, and equipment will need to be sold.
And a lot of facilities will be built. Various estimates anticipate global chip sales to surpass $1 trillion a year by 2030, up from just over $600 billion in 2022.
A stellar track record of steady and profitable returns
Why would an investor choose to invest in a stock like Air Products rather than a chipmaker like Taiwan Semi, especially given the huge growth expectation for the chip industry? Well, semiconductors can be a cyclical investment theme at times, and especially on the chip fab side. As with all manufacturing, chipmaking goes through booms when demand outpaces supply, followed by periods of sales slumps. It can also create some wild fluctuations in stock price that aren't tasteful to many investors.
As a heavy industrial company, Air Products can also go through up-and-down cycles. However, the company has been around a long time, and has carved out a highly profitable and diversified business for itself in the global manufacturing and energy supply chain. It also pays a dividend, which it has consistently increased for decades (the stock is a Dividend Aristocrat). Air Products' total return, which factors in share price increase and dividends paid, has been a steady winner for shareholders.
Data by YCharts.
Will Air Products be a winning investment going forward? I believe it will. Besides manufacturing, the company is also a top provider of renewable energy systems and equipment, like hydrogen. Saving money on energy is a top priority for many organizations these days, especially with inflation running hot in the wake of the pandemic. And here too Air Products could be a top supplier for tech and chipmaking.
In a recent interview, Nvidia's (NVDA +1.67%) vice president of enterprise computing cited a study that points toward computing technology eventually gobbling up a mid-teens percentage of total global energy consumption, up from a low-single-digit percentage today.
Air Products could thus call chip companies a customer by way of this boom in energy consumption too, not just as a supplier of manufacturing gasses. Add that to a long list of other non-tech customers that rely on Air Products to get continuously more efficient.
Is Air Products stock a buy right now?
Air Products stock has outpaced a recent rally in the overall market, rising by nearly 40% from lows in early October to early December. Shares currently trade for just under 32 times trailing 12-month earnings. It's a premium price, one that assumes Air Products will continue putting up market-beating earnings growth for many years.
NYSE: APD
Key Data Points
At this juncture, I'd be inclined to start slowly dollar-cost averaging into Air Products, rather than investing a large sum all at once. Management anticipates growing earnings by 9% to 12% in 2023, which is not bad considering the world is fretting over a possible recession. And if the company can continue growing earnings at a low-teens percentage over the next decade like it has over the previous one, the current valuation certainly isn't all that "expensive."
However, using a discounted cash flow valuation method, at the moment the stock is just a bit over fairly valued assuming a 12% earnings growth rate for the next two years and then 7% earnings growth after that when using a discount rate of 11%.
Air Products & Chemicals doesn't rank as a top priority stock purchase for me right now. However, if you think chip manufacturing hype is real like I do, keep this company on your radar (or start nibbling in small amounts now) to ride the demand for gas and energy supply chain solutions that will be needed in the years ahead.
