Grab This Super Stock Before it Bounces Back

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This stock has lost more than 8% in a week’s time; and I find it stupid. Huntsman’s (NYSE: HUN) core business continues to grow, margins are improving, dividends are great, and its stock is cheaper than most think. In short, it’s a perfect opportunity for Foolish investors.

Right on top

Revenue from Huntsman’s polyurethanes business inched up 13% in the fourth quarter, capping off 2012 with 10% improvement year-on-year. Demand as well as prices of MDI (methylene diphenyl diisocyanate), the key product, continue to hold strong. MDI is primarily used to make foams, which in turn find their way into several products across industries like insulators (construction), paints, adhesives, appliances, and packaging. According to Research and Markets’ latest report, the global MDI market is pegged to grow at a compounded average rate of approximately 6% by 2016. The report tags the Asia-Pacific region as the fastest-growing market in the years to come.

This should be the biggest catalyst for Huntsman as it enjoys 18% MDI market share (in terms of capacity) and derives roughly a third of total sales from the Asia-Pacific region. It is building a propylene (input for polyurethanes) facility in China under a recently announced joint venture with Sinopec and expanding existing U.S. plants to exploit opportunities thrown up by low natural gas prices. These moves are critical to ensure that Huntsman stays at the top of the game even as peers eye a bigger share of the pie.

Construction at BASF’s MDI facility in China is in full swing, and once up by 2014, it will be the world’s largest MDI plant. Dow Chemical (NYSE: DOW) is setting up the world’s largest petrochemical facility with Saudi Aramco with focus on polyurethanes and the Asia-Pacific market. Expected to be up and running by 2016, the plant would generate a whopping $10 billion revenue annually. Comparing this with Huntsman’s total 2012 revenue of around $11 billion indicates what tremendous opportunity this project would be for Dow. Yet, with current market share of just 12%, Dow still has a long way to go.

Growing where it matters

Huntsman’s gross margins have grown steadily over the past five years, with 2012 turning out to be particularly noteworthy. Quick, dance your eyes over to the 2012 mark in the following graph, and observe the two trend lines that follow. Yes, you saw it right: Huntsman’s margins expanded even when revenue didn't. I call it great cost control, or better, proof of management efficiency.

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HUN Gross Profit Margin Quarterly data by YCharts

Huntsman spent most of 2012 overhauling two of its businesses that were eating away into its top and bottom lines like termites. Its Textile Effects (textile dyes and chemicals) business saw entire operations move out of Switzerland to China. The efforts are showing up earlier than expected – the business turned up a positive EBITDA during the fourth quarter compared to a loss of $22 million last year. Huntsman is likely to book $40 million worth of savings this year. Its Advanced Materials (chemical solutions) business is still in the red, but improving nonetheless. As part of restructuring, Huntsman will target high-growth markets over the next year and a half to rake up annual savings of around $70 million. Actions include expanding epoxy resins capacity to target aerospace and other industries.

The two businesses that account for roughly 19% revenue won’t be a drag for long. And they aren’t the only ones pushing Huntsman’s margins higher. Cost-reduction initiatives are also under way in its Pigments business, which has proved to be the biggest chink in Huntsman’s armor in recent times.

Not much to worry

Huntsman’s pigments business constitutes titanium dioxide (TiO2), which is used in industries ranging from paints to pharmaceuticals to personal care. The TiO2 market was at its lowest last year as customers destocked. It was one of the worst performing businesses last year for DuPont (NYSE: DD), the world’s largest TiO2 producer, with sales slipping 8% on lower volumes. DuPont expects persisting weakness to dent its performance chemicals margins by high-single digits this year.

Tronox’s (NYSE: TROX) third-quarter gross margin slumped to just 4% from 30% last year in part due to high input costs, a factor that has only doubled the pain for TiO2 companies. Kronos Worldwide (NYSE: KRO) had a similar story to tell. Despite its TiO2 selling prices improving (a surprising) 20% during the first nine months of 2012, volumes plunged 9%. Coupled with higher costs, Kronos’ gross margins shrank to 32% from 37% a year ago. Its preliminary fourth-quarter report shows a disastrous 95% hole in the bottom line. Ouch.

Tronox should be able to weather future storms as it starts producing key raw materials (it aims to source 100% in-house). DuPont will try to offset any weakness in TiO2 business with its agriculture division, which has swiftly taken over chemicals to be its largest business. Kronos has no option but to wait for markets to turn around, as it is neither vertically integrated nor diversified like Tronox or DuPont.

What are Huntsman’s options? Curtail costs and focus on other businesses while waiting for recovery. It is doing just that, thereby maintaining margins even in sluggishness. Better still, the fact that pigments is just a small fraction of Huntsman’s portfolio, and that it intends to scale down the business further bodes well for the company in the long run.

Its worth

At under 12 times earnings, Huntsman looks like a bargain for its growth prospects and dividend yield of 2.2%. Dow commands a massive 47 times P/E, while DuPont trades at 16 times earnings. Only Kronos sports an attractive P/E of 7 times; but knowing that its life depends on the less-dependable TiO2, it’s not worth it.

Huntsman looks like a stock you can’t go wrong with, and analyst estimates of the company shrinking 14% this year is lowballing. Foolish investors should know what that means. Click here to add Huntsman to your stock watchlist if you want to follow its growth story.

Neha Chamaria has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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