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Vaccine Distribution Is Key for More Cash

December 03, 2020

COVID-19 cases are flaring up once again in the US and Europe but are also extending to the rest of the world. The numbers are staggering.

In response, national, state, provincial as well as local governments are responding with various restrictions, including modified lockdowns.

This is creating further economic woes, particularly on the local individual and business levels.

COVID-19 Cases: US, Europe & Worldwide—Source: Bloomberg Finance, L.P.

And yet, the economic data on a macro level continue to improve, particularly in the US and Asia. The stock markets are predicting improved sales and earnings from S&P 500 members and prognostications are for further improvements into 2021.

Much of the stock market and media attention centers on the vaccine developers and makers. Pfizer (PFE) with BioNTech (BTNX), Moderna (MRNA) and AstraZeneca (AZN) in cooperation with Oxford University are the promoted public company leaders.

But what I want you to focus on is not the vaccines but the delivery of them. This is where the market has yet to really figure out the leaders in both making the vaccines and administering them.

Not Just a Cardboard Box

Let’s start with the shipping containers. The vaccines can’t just be put into cardboard boxes with bubble-wrap.

That works for lots of stuff on its way to your door from Amazon (AMZN), but not for vaccines. Instead, each vial of vaccine and syringes must be carefully packed into individual and custom-engineered containers to ensure that they’re not broken between factory and the end-user.

One of the primary companies that is the leader in engineered packaging is Foam Fabricators. This company designs and makes custom foam packaging for all sorts of specialized industrial applications as well as countless consumer products.

From the foam that protects your new television or laptop to the foam that’s used to protect vials and other components, Foam Fabricators has a 60-plus year history of being one of the best in this business.

And it’s owned by one of my favorite public companies, Compass Diversified Holdings (CODI).

Compass is an investment company that buys and owns a collection of high-quality and strongly branded industrial and specialty consumer products, including products for first responders.

Foam Fabricators has been a big success for Compass over the years. It has a strong customer base, even before the pandemic, and it’s working on the burn to make the specialized shipping products for the vaccine-makers quickly and at a massive scale.

Compass is like a very early version of Berkshire Hathaway (BRK.A) when Warren Buffett was a nimbler investor that bought companies with heavy cash flows and strong products.

Compass Diversified (CODI) Total Return—Source: Bloomberg Finance, L.P.

Revenue continues to rise by a compound annual growth rate (CAGR) of 16.9% over the past five years. And it has piles of cash and very little debt. It pays out lots of dividends from profits amounting to a yield of 7.3%.

Over the past five years, CODI has returned 88.8% for an average annual equivalent of 13.5%. And yet the stock is cheap, as it is valued at a 20% discount to trailing sales. Buy CODI in a taxable account.

Cold, Really Cold

Vaccine shipments also need cold temperatures, although each of the differing vaccines has its own temperature requirements. Pfizer needs -70 degrees Celsius while Moderna needs it a little less frigid.

To make this happen, the primary need is for dry ice. Dry ice is frozen carbon dioxide (CO2), which is already strongly in demand for the surges in food and grocery product deliveries that have taken off during the virus mess. And it works to keep the vaccines under -78 degrees Celsius.

Yet there are already shortages of dry ice. That’s restricting UPS (UPS) shipments, including from my Dad’s favorite Victory Pig Pizza in Wyoming, Pennsylvania to St. Louis, Missouri.

The Compressed Gas Association (CGA) is already calling for a 35% surge in dry ice demand, even before vaccines, for 2020-2021. And the primary sources for dry ice come from ethanol production as well as fertilizer product manufacturing with other alternatives underway.

There are plenty of dry ice companies. But what you should focus on is one of the global primary suppliers that owns Airgas as well as its own branded company in the US amongst its global empire of dry ice and CO2 production companies.

Air Liquide SA (AIQUY) is a Paris-based company that makes cash from gas—lots of it and in many varieties, including CO2 and its frozen variety.

This is a dependable supplier and company that keeps the various rarified air flowing to feed revenue that is growing at a good pace over the past five years averaging gains of 4.5% on a CAGR basis.

Air Liquide ADR (AIQUY) Total Return—Source: Bloomberg Finance, L.P.

The ADR (American Depository Receipt) that represents 0.2 of each share in Paris easily trades in the US and has returned 100.2% for an annual equivalent of 14.9% over the past five years.

The company has lots of cash flow and controlled lower debt. And it pays a dividend yield of 2.0%.

The stock and the ADR are reasonably valued at lower multiples of intrinsic (book) value and trailing sales. AIQUY makes for a great buy right now in a taxable account.

All My Best,

Neil George
Editor, Income Investor’s Digest & Profitable Investing
Author, Income for Life