Du Pont, Dow, Huntsman Stock Could Double or Even Quadruple in Value

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

Fear mongers and the shorts will have you believe that our economy is heading towards a brink, and unfortunately, sluggish job growth has given credence to that pessimism. While economic growth has been slower than economists predicted of late, our economy is still fundamentally moving in the right direction. I recommend betting against the bears by buying more volatile stocks. Chemical producers Huntsman (NYSE: HUN), Dow Chemical (NYSE: DOW), and Du Pont (NYSE: DD) are 46% to 133% more volatile than the broader market. They are well positioned to substantintially outperform should industrialization pick up steam quicker than expected.

And for good reason. They are cheap by both current and historical comparisons. While the S&P 500 trades at 15.4x past earnings (in-line with the historical average), Huntsman and Du Pont trade at 8.8x and 12.8x multiples, respectively. Dow also trades at just 9.6x forward earnings. At the same time, these producers offer high dividend yields ranging from 3.2% to 4.2%.

But sectors often trade at substantially different multiples due to different growth curves, brand value, and capital structures, among other factors. Accordingly, it makes sense to consider the extent to which chemical producers are cheap relative to historical levels. Du Pont's historical 5-year average PE multiple is 14.1x and there is a spread of 8.4x - 23.9x between 5-year high and low PE multiples. The results are even more optimistic for Dow, which has a 5-year average of 31.5x and a spread of 10.1x - 92.2x. Huntsman lacks a full enough public operating history to extrapolate meaningful data from.

Put differently, the sector should basically trade at no less than 9.3x and reasonably around 17x past earnings unless we are in a "this-time-it's-different" mentality. Are times really different than they were, say, a decade ago? In my view, humans are naive to believe that the capital markets won't operate as they have over the long-term. Corporate value creation is basically a given and population growth will fuel appreciation. Moreover, our current economy isn't any more unpredictable than it was during the Gilded Age, the Roaring Twenties and Great Depression, WW1, WW2, or Cultural Revolution when equities performed just fine. As for chemicals specifically, the growth curve ahead appears to be better than it was 5 years ago and better than what the market currently assumes.

Over the past 5 years, Du Pont grew earnings by 1.7% annually. Analysts are now expecting annual EPS growth of 8.9%, which implies 2016 EPS of around $6. At a 17x multiple, the future value of the stock is worth $102.17. Discounting backwards by 12% yields a price target of $58 for nearly a 25% margin of safety on top of a 3.6% dividend yield. If the company trades at my sector low approximation of 10.1x, it would be worth $34.44 in present terms for 28% downside--approximately 1,000 bps of which are canceled by the generous dividend yield. Accordingly, Du Pont has favorable risk/reward with 43% appreciation plus non-reinvested dividend distribution and around 18% downside. I thus encourage investors to disregard the bulls and buy now.

The growth curve ahead is even brighter for Huntsman. Analysts expect annualized growth of 13.5% over the next five years versus -5.7% over the past 5 years. This means 2016 of around $3.09, which, at a 17x multiple, translates to a future stock value of $52.53 - a more than quadrupling of shareholder value. One must assume an egregious 35% discount rate to justify the current price. Again, simply too much risk is being factored in for a company that provides a 3.3% dividend yield.

Huntsman is currently valued at less than $3B and has a PEG ratio well below 1 at 0.65, which indicates future growth is indeed not being fully accounted for. Analysts actually rate the stock a "hold" according to FINVIZ.com despite a consensus $16.11 price target.

Dow is expected to grow earnings 6.8% annually over the next 5 years versus -11.7% over the past 5. This means 2016 EPS of around $3.88, which, at a 17x multiple, translates to a $65.96 future stock value. Discounting backwards by 12% yields a price target of $37.43. This is around 25% upside on top of a 4.2% dividend yield.

Analysts still rate Dow closer to a "sell" than a "buy" however. Much of the reason has to do with the tremendous level of uncertainty surrounding consumer spending, which drives industrial activity. But, as I show herein, even their own estimates speak to the value inherent in chemicals. Backing the sector may be risky, but the upside appears to more than compensate.


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