Midsize Chemical: Best of Both Worlds or Indecisive Junk?

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Some people really hate anything mid-size. After all, the likelihood of this size range suddenly leaping into multi-bagger territory is fairly small. But at the same time these types of companies don't tend to have a huge and dedicated staff who are totally convinced that the company is an invincible juggernaut. So you're kind of stuck. The company probably won't niche down and wedge itself into a tight market segment, and it also probably won't be giving Apple or Exxon a run for their money next week. But let's see if there's something good hiding in the mid-size pile.

Only Running on Two Cylinders

Ashland (NYSE: ASH) has its hand in a lot of pies. Touching on food, coatings, energy, pharma, personal care products and Valvoline, there aren't many areas of life where Ashland doesn't make an impact. Ashland even has an extensive division dedicated to water and waste treatment.

I started to worry that Ashland might be biting off more than it can chew, but then I noticed that the company is trading for 256 times its earnings and is only pulling .3% profit margins. Even though the book value multiple is pretty reasonable, I just can't trust my money with a company that's barely keeping the doors open. I don't even know what's up with paying a dividend under such a condition. It's giving me 2006 REIT flashbacks. I'll pass.

Great... and Common

I really like that Celanese (NYSE: CE) is one of the world's biggest producers of acetyls like vinyl acetate monomer, since these types of chemicals get used pretty much everywhere. I also like that the company is pulling a fair 9.3% profit margin. I even appreciate the reasonably low 12.26 P/E ratio, which is pretty far below the market when last I checked. With margins like that the company could pay for itself from profit after a little under 7 years. I like that this is a company that works with just about everything -- you're probably looking at two or three products that involve polymers right this second. They're everywhere.

My only area of trepidation comes from the commoditized nature of what Celanese does. Price vulnerability is a constant threat -- someone else might burst onto the scene and go cheaper next week. But I might take the risk if Celanese gets under 10 times earnings. I like that threshold because it tends to indicate that the market hasn't forgotten or forsaken a company that might still have some value to it.

Good Numbers and Bad Management

I like how FMC (NYSE: FMC) pulls in an average of $3.4 billion in revenue per year. I also like the company's 10.7% profit margins. Taking in and being able to freely use around $300 million each year is a good place to be most of the time. What I don't especially like is how FMC has a tendency to get itself into bad situations.

In the 1980s it was insider trading. In 2009 it was a potential issue with a chemical called Furadan that's being used to kill African lions -- and the fact that FMC has refused to comment on the matter. I don't like dealing with anybody shady, and this smacks of shady business. While I probably wouldn't buy a company that's trading at more than 21 times its earnings; I don't know if I'd seriously consider FMC even if it was trading for an extremely generous multiple. Who knows if everything they're reporting is even accurate?

Doing Everything Reasonably Well... Except the Environment

Eastman Chemical (NYSE: EMN) has its hands in just about everything. Working in five end-user-powered segments, Eastman's chemicals are everywhere. I appreciate this, and I also appreciate that many chemicals that such a company develops are protected by patents.

What worries me is that there's a price to pay here, and it isn't just 18 times earnings and 3.6 times book value. I'm also concerned that Eastman has been traced back to a number of Superfund sites, so named because it takes a super fund from the government to try and clean them up. I like the valuation, I like how the company's been turning a fair 7.2% profit, but I'm not interested in supporting a company that may be lacking scruples. 

Overall the mid-size companies I've looked at have been a little bland. There's the occasional wreckage of an ecosystem here or there and some overvaluation, but otherwise I'm not too impressed by this range of the industry in general.

pongun 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!

blog comments powered by Disqus