Why This Stock Has Every Chance to Inch Higher

By Neha Chamaria - September 17, 2012 | Tickers: DD, HUN, KRO, DOW | 0 Comments

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The past few quarters haven’t been top-notch for this specialty chemicals company. The top line remained stagnant, and headwinds were strong. Yet, shares of Huntsman (NYSE: HUN) hit a 52-week high this past Friday. What has driven these gains, and is there more to look forward to?

Riding potholes
What’s commendable is that Huntsman’s bottom line grew despite several challenges, internal and external.

• Huntsman should have had a tough time given that nearly a third of its revenue comes from the struggling European region. But that was not to be. On the contrary, it was this market that seemed to push up sales for the company’s largest division, polyurethanes, when other divisions failed to deliver. In its last quarter, volumes for Huntsman’s key product, methylene diphenyl diisocyanate (MDI), grew 15% in the European market, driving its polyurethanes division’s revenue up by around 12%. MDI is used in the manufacture of foams, coatings, adhesives etc. which in turn have wide applications ranging from furniture to automobiles. Huntsman enjoys a market share of 18% in MDI, which is much higher than peer Dow Chemical's (NYSE: DOW) market share of 12%. 
   
• Polyurethanes is also Huntsman’s only product segment that is doing well currently. Its pigments division has been under pressure for some months as a result of customer destocking, which slammed the brakes on the wild run titanium dioxide (TiO2) pigment producers enjoyed last year. Everyone, including the world’s largestTiO2 producer DuPont (NYSE: DD), Huntsman and Kronos Worldwide (NYSE: KRO) struggled with falling sales and margins dip since late last year. Huntsman’s last-quarter pigments division sales were 4% lower from the year-ago period.
• Luck hasn’t really favoured Huntsman’s other two businesses -- textile effects and advanced materials-- either. The two divisions have remained laggards for more than a year because of the double blow of falling sales and rising costs. In its last quarter too, both divisions reported lower sales and profits compared to the year-ago period. Restructuring is currently underway, which has further resulted in additional costs for the company for the past few quarters.

As one can see, there were significant headwinds Huntsman had to deal with in the past twelve months, the effects of which is reflected in its strikingly flat revenue and net income over the period.

HUN Revenue TTM data by YCharts

These numbers don’t seem to justify the massive 59% rise in Huntsman’s stock year-to-date. So why has the market been so benevolent with the company? I think it’s because of two reasons – good dividends and great growth prospects.

On high-growth trajectory
Huntsman’s polyurethanes business looks set to grow further. According to ICIS, prices for MDI are expected to rise further this month in the U.S., and remain firm in Europe. Supported by growing demand, this should result in higher margins for Huntsman. Bullish outlook on MDI has even encouraged analysts at Wells Fargo to raise their estimates for Huntsman’s full-year earnings per share. The company itself is upbeat about the growth potential of the business, and is expanding globally. Its announcement last month to study the feasibility of expansion at its U.S. plant was greeted with applause by shareholders. The company is taking this business to other high-growth markets as well such as Russia and Indonesia.

Huntsman could particularly get a big boost once its capacity expansion plan in China gets approved by regulatory authorities.  China remains a key market for MDI, so much so that the world’s largest chemical company by revenue, BASF, is making huge investments to build the world’s biggest MDI plant in the nation, to be completed by 2014. With Asia Pacific and Europe dominating the MDI market with around 75% share, Huntsman looks smack dab on target with its growth plans. In fact, so focused is Huntsman on its polyurethanes business that it is looking to reduce dependence on its TiO2 business in the longer run.

Beyond TiO2
The situation anyway isn’t too bright for Huntsman’s pigments business currently, though it’s likely to get better as the destocking phase nears its end. While DuPont feels they have left the phase behind with the second quarter, Huntsman expects it to fade away completely only after the third quarter. Till then, margins are likely to remain under pressure as selling prices remain flat while costs continue to rise. Kronos expects its total cost per metric ton for TiO2 for the full-year production to be around 50% to 60% higher compared to last year, which is significant. It’s not a win-win situation right now, but TiO2 market is likely to improve by next year.

Healing wounds
Huntsman’s other two struggling businesses are about to get on track too. The company has already completed a major part of restructuring, which included the uphill task of shifting textiles operations from Switzerland to China. It now expects cost savings to start flowing from the next quarter onwards. Huntsman has already started work on doubling capacity at its McIntosh advanced materials plant. The project is expected to be complete by 2014.

The Foolish bottom line
Not only are Huntsman’s business prospects looking great but so are its efforts to manage high debt levels. Not many liked it when the company’s CFO Kimo Esplin told Reuters some months back that his company won’t raise dividends now. I found it smart, because giving priority to improve credit rating of its bonds and reduce debt makes more sense. Huntsman’s dividend yield is anyway pretty good at 2.5%.

At a P/E of around 10 (which is lower than most peers), and a forward P/E of just 7.7 times, it looks like Huntsman will continue to deliver. And with rumours of a sale following the company closely, there’s every reason to keep an eye on it. To keep track of its growth story, click here to add Huntsman to your personalized stock watchlist.

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