Specialty Chemical Companies for You to Consider

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This is a continuation of my write up of specialty chemical companies that seem to be good investments, including a couple of businesses that produce additives to petroleum or gasoline products (see also: "Specialty Chemical Companies for You to Buy"). These are all in the mid-capitalization range, between $1 billion and $10 billion. A bit of research should help decide where the best investments are.

Divestiture of division should assist profit trends

The first company on my list is OM Group (NYSE: OMG). It is a diversified manufacturer operating through three divisions:

1. Magnetic technologies contributed 39% of 2012 revenue

2. Specialty chemicals 25%

3. Battery technologies 9%

The remaining 27% of sales were derived from the advanced materials segment, that was subsequently divested on March 29.

That division sale, along with the sale of its ultra-pure chemicals business within specialty chemicals, ought to support much-improved margins and better year-over-year profit comparisons.

Remaining businesses will focus on organic growth and synergistic acquisition activities. In fact, OM has a strong balance sheet that should provide funding for such purposes, marked by a low long-term debt-to-equity ratio of 8%.

OM Group's shares are up an impressive 39% this year as of this write-up. Shares are trading at a P/E of 18.4 on a forward basis. More upside may be in the cards as the benefits of its profit enhancing measures are realized.

Methanol producer on a roll

Methanex (NASDAQ: MEOH) is a producer of methanol, a clear liquid that has been generating strong demand thanks to its increasing inclusion in gasoline as well as for household cooking and heating applications and for biodiesel use.

Total sales volumes of methanol rose about 10% in the June quarter, and should continue to trend upward. Along with higher demand and pricing in North America and Europe, China is gaining ground as an international market. As a result, share earnings are apt to approximately double this year if conditions hold.

Methanex shares are trading at a forward P/E ratio of 11.0, but the stock is primarily a growth investment at this juncture. The company is investing in facilities where, geographically, it sees opportunities for several years hence.

Petroleum additives maker performing well

Finally, NewMarket (NYSE: NEU), similar to the previous company, produces petroleum additives. Its four subsidiaries are involved with that operation in some form or another, including a real estate development business that owns its own facility.

Higher pricing and demand ought to allow for earnings growth in the near term. The likes of Royal Dutch Shell and other customers are likely to purchase additional quantities of lubricants, engine oil, and fuel additives. A greater economic recovery should help. Also, further acquisitions would boost the rate of sales and profit growth further.

NewMarket shares' forward P/E ratio is 14.2 as of this report. The stock is more appealing as a near-term growth investment than anything else.


Rating the three stocks listed here in order from best to worst:

1. Methanex shares are appealing for the year ahead, at least, as a growth holding. Its main product, methanol, is receiving solid demand from gasoline producers worldwide. Plus, it is investing in growth projects that ought to allow it to capitalize on higher demand and economic growth internationally.

2. NewMarket operates in a highly profitable market with better-than-average gross margins and profit margins. Its petroleum additives business is likely to fare well over the next year and the long term, depending on stable fuel prices and economic growth.

3. OM Group stock is attractive mostly in light of the company's streamlining activity. It has had a nice uphill climb over the past year.

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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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