Watch Out, This Stock has Stepped on the Gas
Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Just days ago I told you when and why this stock would take off. If you didn't buy in, you can only blame yourself for missing the flight!
An earnings beat when peers disappointed has made Huntsman (NYSE: HUN) turn heads. The chemical maker’s third quarter threw up several key facts that make it worth every watchlist now. A consistently stable primary business and improvement in two struggling businesses are what you should closely follow.
The larger the better
Just days before Huntsman checked in with its numbers, Dow Chemical (NYSE: DOW) reported robust polyurethanes demand from the Asia-Pacific region during the past quarter. Thanks to this high demand, volumes from the market grew 5%. However, this did not save Dow’s performance materials division sales from slipping 8% year-over-year, with lower prices and other weaker markets acting as deterrents.
Dow’s report automatically pushed my expectations for Huntsman higher, as polyurethanes is its key business and Asia an important market. The results are right in front of us: buoyed by good demand from the market and higher selling prices, Huntsman’s polyurethanes division was the only one, apart from textile effects, to see a rise in revenue. The sales growth would have been much better had it not been for currency headwinds. The division’s contribution to operating income also jumped to nearly 60% from last year’s 40% as a result of better prices. Interestingly, Europe, which accounts for nearly a third of Huntsman’s revenue, also played a key role in pushing up the polyurethanes sales. So as always, this business has delivered when others failed.
Huntsman’s pigments division was the weakest, with a sharp 30% fall in revenue. After DuPont’s (NYSE: DD) dud of a third-quarter, I thought the division would be nothing but an eyesore for Huntsman. It was exactly that, eating into the company’s top line as well as profits. Blame white pigment titanium dioxide (which goes into everything from your toothpaste to Oreo filling).
DuPont’s past quarter was hit hard as demand for TiO2 slumped in Asia and Europe due to sluggish construction markets. The result was that despite a decent 4% rise in its agriculture sales, DuPont’s top line slipped 9%, pulled largely by 19% drop in performance chemicals business sales.
Heads up for Kronos Worldwide (NYSE: KRO) investors – the pure TiO2 player is about to report numbers next week, and they are likely to be anything but good. Just as Huntsman’s TiO2 margins were dented by around $350 per ton in the quarter (which led to 55% drop in the division’s operating profits), Kronos’ numbers could be worse as it expects full-year cost per metric ton to be 50% to 60% higher compared to 2011. Tronox (NYSE: TROX) will agree to that.
Although Tronox is as much of a TiO2 producer as others, with 8% industry capacity (close to Huntsman’s 9% and Kronos’ 10% share), it also produces TiO2 feedstock. Soaring input prices encouraged the company to expand its feedstock business to an extent that nearly all raw materials required for its TiO2 business now comes from within the company. Naturally, Tronox knows the input market much better. It expects input prices to be ‘significantly higher’ for the second half of the year compared to same period last year. Brace up for some bad news, Kronos investors!
What cheered me up most were the signs of life Huntsman’s textile effects division finally showed after several quarters of struggle. Revenue for the division rose 5% and losses narrowed considerably. As the company expected, ‘benefits’ of restructuring are showing up. Though the scene wasn’t as bright for the other division under repair (advanced materials), earnings did improve slightly from the same quarter a year ago – a first in several quarters. Huntsman’s plan to expand resins capacity, announced in September, further shows the company’s focus and efforts on bringing this division back on track as soon as possible.
If a strong polyurethanes business and recovery in the two businesses mentioned above made you feel hopeful, I’ve got some more good news. A turnaround in the pigments division might be as near as early 2013 – that’s what all TiO2 producers feel. Any uptick in the market is great news for Huntsman. Meanwhile, the company just got down to expanding its polyurethanes capacity, which certainly looks like the best segment it could invest in right now.
Foolish bottom line
For a company that can keep its chin up despite deriving a good chunk of revenue from Europe, Huntsman certainly deserves attention. The fourth quarter should be a good one, which would make Huntsman one of the few companies to end the year with record earnings. Superb dividend yields (2.6% currently) act as cherry on top. I strongly urge you to keep close tabs on every move Huntsman makes, and every news it breaks. The easiest way to do it is by adding the stock to your personalized stock watchlist. Click here to do it.
Nehams 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.