2 Buys and 1 Sell In the Chemical Industry

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

The financial meltdown of 2008 was particularly hard on cyclical stocks. Companies in the chemical industry reported huge losses in the recessionary period, and 45 U.S. chemical companies had to file for bankruptcy in 2008.

With the economic recovery taking hold, chemical companies have shown signs of relief. The U.S. chemical industry accounts for 15% of the world's chemical industry output, and its contribution towards the GDP of the United States stands at a staggering 25%. We can expect some solid investment opportunities to arise here as the industry has a growth outlook in the United States and internationally.

Larger chemical companies have a better chance of exploiting the revival in the chemical industry as they have global operations with access to multidimensional markets. Three companies in the United States fall into this criterion. They are Huntsman (NYSE: HUN), Dow Chemical (NYSE: DOW) and Eastman Chemical (NYSE: EMN).

Huntsman’s weak fundamentals

Huntsman is a global leader in the consumer and industrial chemical industry. The company’s annual revenues are close to $11 billion. Like all cyclical stocks, the company suffered in the financial meltdown, but the trailing three years have seen the company’s performance improve.

The pigment segment of the company has been its fastest growing segment. The segment was reporting strong margins until prices for titanium dioxide started to fall. Due to this change, the company reported a net loss of $24 million in the first quarter.

The second-fastest growing segment of the company is its polyurethane segment because the company’s margins for MDI urethanes have improved. The earnings from this segment were able to partially offset the negative earnings from the pigment segment. Huntsman is planning to expand its polyurethane business by acquiring the privately held specialty urethane polyols maker Oxid. The acquisition will improve the company’s footprint and possibly take it out of its recent losses.

The current situation of the company looks slim and I would not be investing my money in this company.

Dow Chemical’s attractive dynamics

Dow Chemical is the second largest chemical company globally. Its chemical products are used as raw materials in different industries. The first quarter sales of the company dropped 2% on a year-over-year basis. However, the company expects its performance plastics, electronic & functional materials and agricultural sciences segments to show robust growth in the coming months.

The company has been successful in increasing its quarterly cash flow from operations. As of March 2013, the company has received up to $2.48 billion from its K-Dow transaction with the Petrochemical Industries Company of Kuwait. Dow Chemical used this amount to repurchase $1.5 billion of its shares and reduce the company’s gross debt. The lower amounts of debt would reduce the interest expense of the company making it a less risky investment.

The company is also planning to maximize its advantage of low-cost feedstock. Increasing profitability for farmers will drive the company’s agriculture business. whereas the increase in residential construction in the United States would up the demand for the company’s construction products. This is a turnaround time for the company and its future looks bright.

Eastman’s focused growth

Eastman is a relatively small company when compared to the likes of Huntsman and Dow Chemical. The company is a specialty chemical company and it sells plastics, chemicals and fibers in the United States and internationally. The company benefits from its focused approach because of which it has a portfolio with high organic growth.

The company fuels its growth by using world class technology platforms to develop products that address global market trends. Eastman is a market leader with two-thirds of its sales revenues coming from product lines in leading market positions. The company forecasts its EPS figures to grow by 20% this year, mainly due to the growth in its subsidiary business, Solutia. Due to its focused approach, the company expects to increase its EPS by approximately 50% through 2015.

Eastman is a solid investment opportunity.

The takeaway

Cyclical stocks are becoming more attractive as the U.S. economy recovers. The chemical industry of the United States is a huge chunk of the country’s GDP. The industry has high risk and, therefore, high returns. Investors can look for great returns by investing in Eastman and Dow Chemical, as these companies are poised for growth. Huntsman has been showing weak fundamentals, and until its latest acquisitions start to bear fruit, the company should be avoided.

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Awais Iqbal 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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