This Chemical Company’s CFO Bought Shares
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According to a filing with the SEC, James Giertz, who serves as CFO of HB Fuller (NYSE: FUL), purchased 3,000 shares on Oct. 3 at an average price of $30.02. This investment of just over $90,000 drew our attention because insider purchases tend to be positive signs for a stock. Insiders derive substantial income from a company, and therefore already stand to gain or lose in relation to its prospects. Therefore, they should diversify their wealth away from that company; to ignore diversification, and instead to purchase more shares in the company, they must be quite confident that the stock’s value will increase. Statistically, stocks do tend to rise after an insider purchase. Read more about insider trading. Giertz had previously owned about 60,000 shares, so this is a moderate increase in his position; the stock is up about 63% over the last year, so he is not doubling down. Hedge funds have not released their 13F filings for the third quarter of the year yet, but looking at the second quarter some notable funds added shares during that period. Adage Capital Management bought shares, bringing its total to 1.6 million. Adage is managed by Phil Gross and Robert Atchinson, who had previously run a portfolio at Harvard Management Company; the endowment owns part of Adage (find more stock picks from Adage Capital Management).
HB Fuller produces specialty chemicals products such as adhesives and sealants, and posts a market capitalization of $1.5 billion. Its most recent quarter (the third of its fiscal year) ended in August with the company reporting revenue that was 38% higher than the same period last year. Income from continued operations grew at a slower rate as costs also rose, but still improved by 11%. A gain on sale helped drive net income, and earnings per share, up substantially. In the first nine months of 2012, revenue came in 32% higher than the first nine months of 2011, though income from continued operations was actually down by about a quarter. Wall Street analysts expect little growth in earnings per share from HB Fuller Co over the next several quarters, and so the trailing and forward P/E multiples are about even at 11.
Three other specialty chemical companies are RPM International (NYSE: RPM), Huntsman Corporation (NYSE: HUN), and PolyOne Corporation (NYSE: POL). HB Fuller is priced about even with these companies: Huntsman is a bit cheaper, with its forward P/E actually dropping to 7, and higher expected growth at the other two peers brings their earnings multiples down from 20 on a trailing basis to 12-13 on a forward basis. We’d advise against setting up a pair trade, as we’re not certain of the specific product dynamics among these companies, but in general we’d prefer the chemical companies which are already a reasonable value based on actual earnings as opposed to those which are expected to get to value levels through earnings growth. As such, we don’t think that RPM or PolyOne are buys at this time. RPM and PolyOne have also seen declining earnings compared to a year ago, while Huntsman’s last report showed net income up slightly over what it achieved in Q2 2011.
Based on HB Fuller’s adhesive and sealant-based business, we would also compare it to 3M (NYSE: MMM). We had looked at 3M earlier this month. Revenue and net income at 3M were flat in the first half of the year versus the same period in 2011, but buybacks had caused earnings per share to be up 5%. Its pricing is reasonable for such a large conglomerate, at 16 times trailing earnings and 14 times forward earnings estimates, but note that these figures are well above the numbers for HB Fuller. 3M probably doesn’t warrant quite that high a premium on its earnings.
As such, 3M looks a bit more expensive than HB Fuller. We’ve already discussed how we’d rather own HB Fuller than PolyOne or RPM due to their premium based on trailing earnings. Huntsman looks similarly cheap, and if an investor wants exposure to the chemicals industry they should examine these two companies and their product lines in more detail.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend 3M Company. 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.If you have questions about this post or the Fool’s blog network, click here for information.