Is There an Alternative to the Alternatives?

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Major financial media outlets don’t talk about it, and it doesn’t have any chemistry with analysts like the highly sought-after blue chip companies. However, producers of industrial chemicals, such as methanol, have been gaining in momentum over the last year as demand has skyrocketed worldwide, especially in the fast booming Asian markets. As a testament to growing demand, one of the largest producers of methanol, Methanex (NASDAQ: MEOH), has increased its market capitalization by 70% over the past 12 months.

Out of global methanol production, almost 33% is used to produce formaldehyde, which is the core ingredient for materials such as paints and plywood. As the U.S. homebuilding sector picks back up, demand for formaldehyde and methanol is on the rise. Another recent trend is using methanol as a substitute for ethanol to fuel transport vehicles. Ether Clean Fuels reported that during 2011, 7 million tones of this chemical were used as fuels. Rising fuel price also had a positive effect on methanol so far as substitute effects are concerned.

Natural Gas is Critical for Methanol Production

Methanol is produced from methane, which is the scientific name of natural gas. There are various technologies such as Fischer-Tropsch, MTG, STG+, etc., but without getting into the technological details, it is safe to say that the price of methanol will heavily depend on its raw material, natural gas.

Among several companies, Methanex Corporation, Celanese Corporation (NYSE: CE) and Eastman Chemical Company (NYSE: EMN) are considered to be the market leaders in the production of methanol.

Methanex has been supplying methanol to international markets, and it is the market leader with 15% of global market share. Its operation spans across North America, Asia Pacific, Europe and Latin America. Its stock was trading at $26.04 back in June 2012, and by May 20, 2013, it gained 76.30% in value and was trading at $45.91. A month earlier, Zacks Investment Research upgraded the company to “outperform” rating from the previous “neutral.” It can be justified after the board of Methanex approved a dividend increase by 8%, from $0.185 to $0.20 per share back in April 2013. According to a study by Zacks, Methanex’s P/E ratio is estimated to be 12.13, which is considerably low in comparison to industry average P/E ratio of 21.80. Scotiabank has revised the stock’s annual target for 2013 from $48 to $55 back in May 21, 2013. Based on the low P/E ratio and Scotiabank’s forecast, Methanex has some room to move upwards from here.

A major manufacturer of chemical products, Celanese Corporation has five business segments. Its product portfolio consists of chemical intermediates, acetyl products, acetate products, technical polymers, ticona and performance products. The current P/E ratio of Celanese is 13.52 compared to 21.80 industry average. However, its earnings per share (EPS) is $3.53 compared to -$0.39 of Methanex, making it a superior choice to invest with. Over the last 52 weeks its stock price went from $32.77 to $51.58, which constitutes a 57.40% gain. 

Eastman Chemical Company

With over 40 manufacturing plants in 16 countries, Eastman Chemical Company is a global chemicals venture specializing in a broad range of advanced materials, chemicals and fibers. It has an EPS of $3.48, and the company’s stock has been performing well over the last year. Its stock has a 52 weeks range of $42.90 - $75.18, which constitutes a 75.25% increase. However, the P/E ratio of the company is slightly high compared to major competitors (listed above), currently at 19.79, which is very close to the industry average of 21.80.

Recommendation

Based on our competitive analysis, although Methanex has the largest market share, it is the only aforementioned company to have negative earnings per share (EPS). With a similar P/E ratio to Celanese, it is attractive to own Methanex stock, as its EPS is currently at $3.53. Compared to Methanex and Eastman’s over 70% gain in last 12 months, Celanese only had a 57.40% growth so far, making it likely that it has better potential on the upside, considering current trends in the methanol industry remain intact.

Conclusion

Back in February 2012, President Barack Obama famously cited United States as the “Saudi Arabia of natural gas.” A report from M.I.T. mentioned methanol as the most efficient and inexpensively produced source of energy in the United States. The current trend in China as well as in US is converting oil-based vehicles to alternative energy solutions such as methanol. Along with the boom in U.S. housing market, which requires substances made directly from methanol (such as plywood), the prospect for methanol and its producers is nothing but promising.

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