Specialty Chemical Companies for You to Buy

Damon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The major specialty chemical companies are highlighted by excellent margins, usually thanks to a sizable share of one particular end market. With manufacturing activity likely on the rise, it may be a good industry to choose from for portfolio additions.

I would like to provide an overview of a few companies from the group, along with some important metrics (may differ for each firm) and investment recommendations.

Food and fragrance-related firm on the rise

The first company I will present is one of the largest producers of flavors and fragrances for use by the food, beverage, personal care, and household industries, namely International Flavors & Fragrances (NYSE: IFF). It is, in fact, a global supplier, with 32% of last year's sales derived from Europe, 27% out of Asia, 25% contributed by North America, and 16% Latin America.

What I immediately recognized about this entity was its solid rate of profit growth, including during the March quarter, when share earnings rose to $1.10 from $0.99. A quick review finds that the increase was mostly attributable to its fragrances business line, and much of that stemmed from cost containment. In fact, segment earnings climbed 22% year-over-year.

This company is noteworthy for strong product (gross) margins within its industry, and this metric appears to be on the upturn further. In terms of cash use, its investments in emerging market expansion, mostly Asia of late, are evident and bearing fruit. Specifically, fragrance sales from such regions increased 18% in the March quarter.

The shares are trading at a 16.4 forward P/E, based on guidance that should hold firm when the company reports earnings on August 6. As a top company in the end markets it serves, the stock is advised as a good long-term portfolio selection.

A food additive company with turnaround potential

Sensient Technologies (NYSE: SXT )is a producer of advanced color, flavor, and fragrance systems. Its customer contingency consists of food, beverage, cosmetic, and pharmaceutical entities, with the bulk, 55%, of revenue contributed by its food and beverage colors product line.

After a record sales and earnings year in 2012, Sensient is likely on pace to again top previous-year results. The major theme among chemical makers I like has been better-than industry average gross margins, and expansion of that measure. Sensient is no exception, as it is benefiting from a higher-profit merchandise mix in both its food and non-food colors business.

Certainly, Sensient is a top choice in terms of its gross and profit margins, as well as financial strength / balance sheet metrics, including current ratio and long-term debt to equity. It is aiming to boost efficiency even more, as well as investing in the expansion of its capabilities.

Sensient's P/E is 14.7 times forward share earnings, as of this write up. It has price upside from its current quotation. Investors should also be aware of the return of cash to shareholders regularly through repurchases and dividends.

Making strides in housing market through acquisition

A specialty chemical producer I had written a post about earlier this year in reference to the housing market upturn (see: "3 Ways to Play the Housing Recovery ") is RPM International (NYSE: RPM), a manufacturer of chemicals for the industrial and consumer end markets. Its industrial unit, contributing nearly two-thirds of total revenue, is primarily composed of maintenance and protection products utilized for a range of construction processes.

The company is performing well behind an improving market for commercial construction products. This is partly thanks to acquisitions, as well, such as the buyout of Viapol, a Brazilian flooring business, earlier this year, in addition to HiChem and Kirker, two consumer-related firms.

Again, this company is marked by a solid gross margin that is gaining ground largely behind new offerings with higher price points. Its share earnings are growing rather rapidly and will probably continue to do so at a double-digit pace, at least in the near term.

The shares are trading at about 17.1 times forward share earnings, and can be considered a growth investment at this juncture. They yield about 2.7% on an annual basis.

A solid group

This may be a good time to add a specialty chemical maker, such as a food/fragrance firm provider, to your holdings. The ones chosen here are largely highlighted by strong gross margins, healthy market share, and activities focused on building presences in higher-growth units.

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Damon Churchwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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