A Mid-Cap Chemical stock that Could Close 2012 Strongly
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One chemical maker I have been keeping an eye on is Huntsman Corp.(NYSE: HUN), a $4.1 billion market cap company that caters to seemingly every industry from paints to aerospace. HUN's recovery persisted in the September quarter, when it earned $0.70 a share pre-restructuring charges, versus the prior-year's $0.51, despite modestly lower sales. Average selling prices are a key factor in the performance of Huntsman, and that metric surprisingly climbed 3% for its core polyurethane offerings, and 5% for its textile products, in the period. Of course, sluggish demand and pricing pressure in other segments limited results. But, there are positive trends here that may not have been noticed by many.
Indeed, the shares are trading at a P/E multiple below 8. Share earnings this year are likely to approximate $2.30. Concerns may be that the bottom-line rebound has been facilitated largely by the aforementioned restructuring and other cost containment. Moreover, Huntsman is highly leveraged, recently taking on an additional $400 million in long-term debt. Capital expenditures of between $425 million and $450 million are a probable use of cash.
But, the outlook remains bright for 2013, according to management. Profit gains appear on tap for all segments (including Polyurethanes, Advanced Materials, Performance Products, and Textile Effects), with the exception of Pigments, where near-term earnings pressure and inflated commodity costs (due to favorable ore contracts expiring) are apt to put a damper on income. Huntsman does have some advantages in the raw material market, including its foothold in the U.S. Gulf Coast. Overall, a more favorable cost structure is in the cards again in 2013. In a sector marked by relatively consistent sales, thanks to the wide range of customers served, this augurs well for an ongoing upturn. Plus, Huntsman is making strides in European and Asian regions, a likely catalyst next year, disregarding the negative effect of weak Chinese wind energy demand.
In all, Huntsman boasts numerous widely known companies as customers for its polyurethane offerings, including BMW and General Electric. Specific poly product lines include those that are wide margined and higher growth. Interestingly, it is one of only three domestic producers of polyols, as well as its byproduct, MTBE, a low carbon and high octane gasoline additive.
That said, HUN is dwarfed in size in the polyurethane field by conglomerates. These consist of the likes of Germany's BASF and Bayer, along with The Dow Chemical Company (NYSE: DOW) and LyondellBasell Industries (NYSE: LYB). Dow's polyurethane presence is mostly constrained to the construction market in the form of foams and foam sealants. The more than $30 billion market capitalization entity operates a sizable Coatings and Infrastructure arm, competing with HUN within the construction, adhesives and other sectors. Some of its performance chemicals are also utilized in appliances, where HUN makes its mark. Looking at LYB, the $26 billion behemoth is primarily a petrochemical market participant. Several of its products used in paint processing are likely substitutes for Huntsman's poly offerings. On one hand these giant firms may well not concentrate their efforts on the poly business as substantially as HUN, though they also could have better access to financing that allows them to seize market opportunities.
Elsewhere, Huntsman maintains a solid share of the performance specialty market, with customization allowing for a proprietary product advantage and margins are thus healthy. The profitability of its Pigments business is above company norms. HUN holds a leading market share in titanium dioxide solutions, a type of pigment that causes whiteness, opacity, and brightness. Competition is more fierce in the Advanced Materials operations where domestic and emerging Asian firms are rivals. Finally, the modestly-sized Pigments business is bleeding red ink because of major industry players such as DuPont (NYSE: DD) with greater financial resources and economies of scale. DuPont, is a $39 billion market cap component of the Dow 30 Industrial Average.
In all, a risk-tolerant investor could benefit not only from the capital gains that may well ensue from increased investor attention, but also the payout which currently yields around 2.3%.
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