1 Stock That Could Move Up on Europe Advantage
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Huntsman (NYSE: HUN) must be thanking its stars for deriving nearly a third of its revenue from the struggling European region. No, you didn’t hear it wrong. It was higher sales from the region that helped the chemical giant beat Street estimates on the bottom line and keep revenue flat during its second quarter.
Things should only improve for the company from here. Here’s why…
Europe: the savior
Huntsman’s polyurethanes business (which is also its largest, accounting for 42% of total sales) stole the show as the only division where sales grew during the second quarter, saving the company from a big blow to its top line. Impressively, sales rose on the back of higher volumes, and not prices despite the company implementing price increases. Selling prices in the polyurethanes business were lower for peer Dow Chemical (NYSE: DOW) as well during its last quarter, although it witnessed robust demand from markets like Asia.
But here’s the most interesting point—it was Europe that helped the division perform so well. The 12% rise in the division’s revenue was entirely because volumes for the company’s key product, MDI, grew 15% in the European market. Pretty unusual, isn’t it?
The company’s second largest division—performance products—which deals in specialty chemical products such as amines, surfactants etc. failed to deliver as both volumes and prices fell.
I wasn’t expecting Huntsman’s pigments division to perform well either, given the pressures the titanium dioxide industry has been facing for some months. Customer destocking put an end to the dream run TiO2 producers were enjoying last year, resulting in a painful three quarters. But the lean period seems to be ending. Although DuPont (NYSE: DD) felt the destocking phase had already ended with the first quarter, Huntsman sees it continuing for another quarter before coming to an end. We are likely to get further insight when Kronos Worldwide reports its numbers in some days.
Interestingly, although sales volumes remain low, prices of TiO2 are on the rise. This was evident in the last quarters of both DuPont and Huntsman. None of these companies are putting further price increases on the back burner yet. DuPont remains bullish on the long term-prospects of the TiO2 business, and so does Huntsman. We’ll wait and see what Kronos has to say.
Huntsman expects lower profits from the division during the third quarter because of rising input costs. High titanium ore costs weren’t much of a concern till now because Huntsman had already booked some low-price contracts earlier that took care of nearly 40% of its yearly input requirements. With these contracts ending, cost pressures could be more pronounced in the forthcoming quarters.
But the talking point is that Huntsman seems to be losing interest in this business which was proving to be highly profitable till less than a year ago. It has clearly said how it will ‘become less dependent’ on ‘TiO2 earnings as a percentage of (its) overall business’ over time. Probably, this also explains why most of the company’s investment plans are directed towards its polyurethanes business.
Focus on the largest
In a bid to expand its polyurethanes business in growing markets like Russia, Huntsman took over an existing Russian-based joint venture last month. The company is also taking its MDI business to other growing markets like Indonesia.
Unfortunately, Huntsman’s plan to expand MDI production capacity in China is still on tenterhooks as it awaits approval from the Chinese regulatory authorities. So high is the scope for MDI business growth in China that even the world’s largest chemical company by revenue, BASF (NASDAQOTH: BASFY.PK), has its eyes on it. BASF won approval for its new MDI facility in Chongqing last year, and is hoping to start operations by 2014.
I feel Huntsman is hitting the right note by planning investments at a time when natural gas (which is a key input) prices are at the bottom of the barrel. Hopefully, we should see more investment announcements in the next twelve months or so.
Huntsman’s quarterly performances might not be on a high note right now, but things should certainly improve by the next quarter or two. One reason for low profits has been continued weakness in two of its divisions—textile effects and advanced materials. But Huntsman took up the challenge of massive restructuring, which even included shifting operations from one country (Switzerland) to another (China). With a major part of the overhaul over, it’s now time for benefits in the form of cost savings to flow in from next quarter onwards.
Meanwhile, theTiO2 market is also improving, which should boost its pigments division margins moving on. And demand in its two largest divisions continues to remain firm.
The Foolish conclusion
If overall business outlook looks decent, so do the company’s efforts to strengthen its balance sheet. Some months back, Huntsman’s CFO Kimo Esplin told Reuters his company’s focus is not on raising dividends right now but on reducing debt and improving the credit rating of its bonds. I think it’s a sensible approach, especially when debts are high and the current dividend yield is pretty decent at 3.2%.
But the talking point has been the possibility of Huntsman getting acquired. I do not recommend speculative trades, but the fact that the company looks like a potential takeover target indicates that its business is strong and has good growth potential. I suggest you keep a tab on Huntsman by adding it to your stock watchlist. Click here to do it.
Neha Chamaria has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.