1 Reason This Stock Could Head Higher Next Week
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After miserable numbers from DuPont (NYSE: DD) and a mixed bag from Dow Chemical (NYSE: DOW), all eyes are now fixed on chemical maker Huntsman (NYSE: HUN), which is about to check in with its third-quarter numbers next week.
When a company like DuPont couldn’t escape the blow of global concerns, expecting Huntsman to deliver might sound a bit overboard now. DuPont is not only more diversified than Huntsman but also has an agri-business for support (and the agriculture space is certainly in a better position now than the chemical sector).
Huntsman operates five business divisions, and present conditions tell me four of them have high possibility of reporting lower sales and earnings during the third quarter. Well, that’s definitely not good news for Huntsman investors.
Only This Could Save It!
More than 40% of Huntsman’s revenue comes from its polyurethanes division, which in turn depends largely on the demand for key product methylene diphenyl diisocyanate (MDI). MDI is used widely in insulation, adhesives, coatings, consumer products, and other industrial applications. Fortunately, demand for MDI has picked up in recent months. Combined with possible price hikes implemented by Huntsman, I feel this division could turn out to be the best performer in the third quarter. Dow Chemical too reported higher operating profits for its performance materials division in its last quarter backed primarily by polyurethane demand. Dow’s share in the MDI market stands at around 12% (in terms of capacity), which is much lower than Huntsman’s share of 18%.
Europe, and Good?
Also, don’t be surprised if the struggling European market that is giving sleepless nights to many emerges as a key revenue driver for Huntsman’s polyurethanes division. It is a critical market, accounting for nearly 40% of the company’s total MDI revenue. In its second quarter, Huntsman’s MDI volumes grew 15% in the European market, pushing up the division’s total revenue by around 12%.
But there’s a headwind too. Even if sales improve, profits for the division are unlikely to be impressive for two reasons. One, a spike in benzene input costs may weigh on margins, and two, one of Huntsman’s facilities suffered a sudden outage in July which could again mean additional costs on repairs and maintenance.
Where’s the Respite?
I am not expecting much from Huntsman’s performance products or pigments division. The numbers from the latter could particularly be bad, as was the case with DuPont.
Demand for key pigment titanium dioxide remains sluggish, prices are way too low as compared to where they were last year, and raw material (ore) costs have only headed north in recent months. These factors took a heavy toll on DuPont’s performance chemicals division in its third quarter, pulling its top line down by 19% from the year-ago period. Not surprisingly, right after DuPont’s earnings announcement and its stock crash, shares of both Huntsman and Kronos Worldwide (NYSE: KRO), which deal in TiO2 and are about to report their numbers, also slumped by more than 4% each on a single day.
It’s going to be a tough quarter for both these companies, no doubt. Huntsman had projected the combination of low selling prices and high costs to dent its TiO2 margins by as much as $350 per ton in its third quarter, while Kronos expects to end the year with a 50% to 60% jump in its cost per metric ton for TiO2 produced. If that’s the case, Kronos could find it hard to impress the Street when it reports numbers next week. Interestingly, Kronos had earlier forecasted an uptick in demand as well as price of TiO2 from the third quarter onwards. I am eagerly waiting for any hints of it in its forthcoming earnings release, as that would be great news for all these companies.
The Story Continues…
As for Huntsman’s performance products business, which makes over 2,000 specialty chemical products having wide applications in several industries, volumes and prices continue to remain sluggish due to global weakness. So earnings from the division are likely to be lower compared to last year, though they could be better sequentially as the company is likely to have pushed a scheduled plant maintenance turnaround to next year.
Time for the Two to Wake Up
What I'm most eagerly waiting for is to see how Huntsman’s remaining two divisions, textile effects and advanced materials, fare. Both divisions remained laggards for several quarters as sales slipped and costs surged, urging the company to announce massive restructuring plans (including shifting of operations to another country) around this time last year. With the two businesses together accounting for nearly 20% of Huntsman’s total revenue, any dip in sales or profits hits the company’s top and bottom lines directly.
Huntsman had earlier mentioned how the ‘benefits’ of restructuring should start reflecting from the second half of the year, which means we should ideally get the first glimpses in its third quarter earnings release. Unless these divisions turn around, Huntsman’s operational performance won’t hit the point that truly excites me.
Foolish Final Thoughts
Analysts are expecting Huntsman’s third- quarter revenue to dip by low single-digits, while earnings to increase by around 13% from the year-ago period. If it clicks, that would be the perfect reason for the market to put this stock back on its journey to its 52-week high, a level it hit last month. If that’s not reason enough to have Huntsman on your radar, the company is also being seen by many as the perfect potential takeover target. What if the CEO starts getting serious about the offers? You definitely would not want to miss any updates. Just click here to add Huntsman to your stock watchlist to stay updated.
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.