Investment Opportunities in Specialty Chemical Companies
Awais is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The majority of the investment community considers the chemical industry as a highly cyclical industry. To a large extent, this sentiment is true. The financial meltdown of 2008 was very hard on the companies engaged in the chemical industry.
Companies producing specialty chemicals are a little different. Their focus on a particular line of chemicals and their research on the development of these chemicals makes them an attractive investment opportunity. Three specialty chemical companies that have caught my eyes are H.B. Fuller (NYSE: FUL), Chemtura (NYSE: CHMT), and Albemarle (NYSE: ALB). Let’s dig further into the operations of these companies to find out which one them represents the best investment opportunity.
H.B. Fuller’s global growth
H.B. Fuller specializes in manufacturing and marketing sealants, adhesives, and other specialty chemicals across the globe. Its products include special adhesives which have application in various markets, including packaging, assembly, flooring, textiles etc. The company has been showing organic growth between 6% and 10% for the last three years. Its global investments and focus on key end-markets have led to growth in its EBITDA from 5.1% in 2008 to 10.1% in the TTM period.
Adhesives are a large global market with significant growth segments. The types of adhesives that H.B. Fuller produces are high value-add products. The market for adhesives is constantly changing though, as it is driven by newer needs of highly dynamic companies. There are very few companies that have the global presence and the technical abilities like H.B. Fuller to address these demands.
H.B. Fuller recently acquired the Forbo industrial adhesive unit to increase its regional presence in Europe. This is part of a chain of acquisitions by H.B. Fuller and because of this, the company now has operations in growing economies like Malaysia, Turkey, China, India, and Brazil. I am very positive about the future of this company.
Chemtura’s diversified business
Chemtura is another specialty chemical manufacturer. The company operates through its industrial performance products segment, industrial engineering products segment, consumer products, and the agrosoultions segment. The company is also globally oriented as it is present in more than 100 countries and 52% of its net sales are to customers outside the United States.
The company also has 25 manufacturing facilities in 12 countries. It reported massive net losses from the start of the financial meltdown in 2008 to the year 2010. In 2011, the company reported a net profit, but its net profit figures have been decreasing ever since.
The company has some reasonable growth plans for its four different segments. Its industrial performance segment has developed a range of additives to reduce emissions and improve gas mileage in automobiles. The segment has also next generation refrigeration lubricants for the refrigeration & air conditioning industries. Its industrial engineering segment is working on alternative energy and inputs for the manufacture of high brightness LED lights.
This will help the company tap into the growing electronics markets for LED as the public is trending away from traditional incandescent lighting. Its consumer products segment has well-recognized brands and the agrosoultions segment has access to expanding global markets. The company is well-diversified and one can expect it to show better performance in the years to come.
Albemarle’s profitable niche
Albemarle is my last pick from the specialty chemical companies. The company operates through its polymer solutions segment, catalysts segment, and fine chemistry segment. Albemarle has been successful in its strategy of targeting a few core niches where it enjoys a competitively strong position. The company has a competitive advantage in its petroleum products and bromine catalysts products.
The company’s fine chemicals and catalysts segment generate almost 68% of revenue. The fine chemicals and catalysts segment also help generate striking operating margins of 21% and 27%, respectively. The catalyst segment makes most of it revenue by developing, manufacturing, and selling catalysts to refineries.
Other than Albemarle, there are only four or five other companies serving this market as the development of such catalysts requires significant spending on research and development and a close relationship with end customers. Albemarle has significant potential going forward.
From the three specialty chemical companies above, H.B. Fuller represents the best investment opportunity. The other two companies have solid business models, but their performance have been a little shaky in recent times.
The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.
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!