Big Chemical Companies: Safe Havens or Lumbering Monsters?
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I've got a bit of ambivalence about big companies in general. On the one hand, they tend to be fairly stable because size grants a bit of leeway. There's a certain social proof that keeps people working harder to maintain a company that they believe can't possibly fail. But at the same time, it's really easy to get caught up in dogma and expect that things are never going to change. Duh, change is the only constant. So let's look at some of the biggest chemical companies there are and see whether they're worth your money or not.
A Good Idea if it Dips
Sociedad Quimica y Minera (NYSE: SQM) is a Chilean company that's pretty highly diversified. As a gardner, I can appreciate that Quimica produces plant nutrients, and the industrial chemical offerings kind of let the company play both sides. More development is more profit, and more pastoral support is just as good for business. At $15.39 billion, this company's kind of the runt of this list. I like that because a smaller company has more room to grow. It doesn't hurt when you're pulling a 28% profit margin and paying a nice 2.7% dividend. Of course, like most good companies Quimica isn't exactly a steal, trading at 23 times earnings and 6.7 times book value. I'd keep an eye out in case the company's share price dips substantially.
What Makes These Chemicals Special?
Air Products and Chemicals (NYSE: APD) is a big supplier of things we all desperately need. Serving the industrial and tech sector clients is just nice, but serving healthcare and food is kind of a big deal. I like the company's leading positions in epoxies, coatings, adhesives, the liquefaction of natural gas, semiconductors and refinery hydrogen. What kind of worries me is that even as an $18 billion company, it's a little hard to maintain dominant positions in so many different arenas. Considering that several of these are essentially commodities, I'd be concerned that a dark horse could swoop in and grab market share with a lower price. And the market may agree with me on that concern because of the reasonable valuations APD is currently at (15.77 times earnings and 2.8 times book value). I can honestly say I don't know what makes these chemicals all that special, but if APD gets any cheaper I may need to dig a little deeper and find out.
Fear the Big Spenders
I'm not part of the camp that respects a big spender. To be honest, I find discretion in one's finances to be composed of both more valor and more value. Take Dow Chemical (NYSE: DOW), for example. Spending more than $1 billion on research and development over an average year, Dow is the biggest spender in chemical companies. And yet it's only the third largest chemical company by market cap and only pulls a rather weak 3.3% profit margin. While I appreciate that there could be some hidden value since the company only trades for twice its book value, I'm still a little wary of trading for more than 25 times earnings. I like hunger, but it's easy to use up a lot of passion chasing your tail. It doesn't necessarily mean you're getting anywhere. They might be better off spending a bit less and negotiating better licensing for their intellectual property. Until I see better profitability and a better deal on the valuation front, I'll pass.
I Like Lexicon Builders
Some of my favorite companies basically change the way we talk. FedEx did it, Google did it, and it could be argued that Apple has made an impact on everyday speech. But E.I. duPont de Nemours and Company (NYSE: DD) did it a lot earlier. While I'm not super-impressed that DuPont is only turning a 7.7% profit margin, I'm okay that it's trading at around 14 times earnings and just over 4 times book value. When you own lycra, neoprene, freon, nylon, kevlar... dude, if it sounds like an alien species DuPont probably invented it, and that's amazing. While I might be tempted to worry that the company might be past its prime, I keep reminding myself of the guy at the patent office who said that everything important that can be invented already has been. About 90 years later his great-grandkids are probably still shaking their heads at that level of short-sightedness. From what I've seen, DuPont is my favorite on this list if I were going to pick up shares soon. If one waits around, who knows where share prices might go?
I like companies that come through with consistency. Big companies that have been around awhile tend to do that. But they also have to be reasonably priced.
pongun has no position in any stocks mentioned. The Motley Fool recommends Sociedad Quimica y Minera (ADR). 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!