Why this Stock Could Fly Through the Roof Next Week
Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
After a mixed bag from DuPont (NYSE: DD), all eyes will be on the other chemical giant set to report its second-quarter numbers next week. But though DuPont had a strong agriculture business for support, Huntsman’s (NYSE: HUN) fate lies largely in the hands of businesses that aren’t doing too well lately. Does that mean the company will be a complete no-show? Not necessary. Here’s why…
Huntsman surprised me last time when higher demand from the European region for key product MDI drove its largest division, polyurethane’s, top line by 17%. But volumes weren’t really great, and top line grew primarily because of higher prices. I am expecting this factor to be at play during the second quarter as well, underpinned by the fresh price increases Huntsman implemented as it stepped into the quarter.
End to white woes?
Expectations from Huntsman’s pigments division are relatively low. Titanium dioxide producers like Huntsman, Kronos Worldwide, and DuPont were laughing their way to the banks till late last year when customer destocking pulled the plug on that run hurting margins. Soaring input costs added salt to the wounds.
But the destocking phase seems to have come to an end, as evidenced by DuPont’s just released second-quarter numbers. The world's largest TiO2 producer, in fact, has stuck to its bullish outlook for the pigment market. Huntsman earlier predicted an improvement in its second-quarter volumes. Further, to offset rising costs, Huntsman had hinted how it might continue to increase prices throughout the year. It will be interesting to see if it still says so.
More importantly, low-price raw material contracts that Huntsman booked earlier should take care of some of its input costs for the second quarter. TiO2 volumes might not be as much as last year’s, but should be up sequentially.
As for its two other divisions-- textile effects and advanced materials – both have fumbled because of falling sales and rising costs, compelling Huntsman to undertake massive restructuring. Closing down facilities and shifting operations obviously took a toll on the company’s margins. With Huntsman not expecting the benefits of restructuring moves to be visible before the latter half of the year, I am expecting these divisions to continue to lag in the second quarter. Yet, sequential earnings could be up due to seasonal factors particularly in the textiles division, which typically experiences a strong second quarter.
But a major concern for Huntsman is that it derives nearly more than a third of its revenue from markets outside the U.S. and Europe. Emerging markets are slowing down, and the company might have to face it in its second quarter. Nevertheless, I feel there are fair chances Huntsman could surprise the Street by beating analysts’ muted estimates of a 2.8% rise in its top line.
Running on gas
Being one of its key inputs, the lower the natural gas prices, the better it is for Huntsman-- benefits of which should reflect in its numbers. But what impresses me is that the company is looking beyond natural gas as a cost-cutter. It is using rock-bottom gas prices as an opportunity to kick off some huge investments such as plans to increase ethylene oxide capacity by nearly 25%.
Huntsman isn’t the only one doing so, though. Dow Chemical (NYSE: DOW) has several plans up its sleeves, including setting up an ethylene plant in Texas and new propylene facilities, and restarting an existing cracker. Westlake Chemical is likewise expanding two of its crackers and planning capacity.
CEO Peter Huntsman earlier hinted at how his company will continue to look for further expansion opportunities, and I hope we get a whiff of it in the upcoming earnings call. But whether there is any mention of these investments or not, one that is most likely to make way into the call is Huntsman’s recent acquisition of Russia-based polyurethane system supplier HNMG — a move that will enable the company to strengthen its foothold in the high-potential market.
Wait, there’s more!
Having said that, if you think I have wrapped it up for Huntsman, go slow. My ears will cling closely to every word the CEO utters, not for numbers or plans, but for hints of Huntsman getting acquired. Yes, speculation that the company makes for a great potential takeover target were always afloat; but the rumor heated up in June when news that Bank of America (NYSE: BAC), which is closely associated with Huntsman, is approaching top private equity firms to generate talks of a potential deal surfaced.
Remember Jon Huntsman, founder of the company, had earlier aroused the market’s interest when he said how his company will consider any option that could increase shareholder value. Even the slightest hints of a sale and Huntsman’s shares could fly through the roof irrespective of quarterly performance.
Final Foolish thoughts
DuPont has expressed caution for the full year, and so might Huntsman. But chances of the company over-riding Street’s low estimates, particularly on the top line, aren’t slim. Whatever be the numbers, long-term investors shouldn’t worry as Huntsman is a strong company that can handle macro challenges.
And when you have a founder saying his aim this year is to "improve shareholder value substantially" you needn’t worry. Stay tuned for a detailed analysis of Huntsman’s numbers next week.
Neha Chamaria has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America. 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.