2 Attractive Chemical Stocks to Buy Now
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
After the financial crisis, many investors understandably want nothing to do with chemicals. The ups and downs of these companies have created and lost fortunes almost overnight. Thus, suffice to say, the industry is made for those willing to take on high risk. Fortunately, one of the central tenets of financial theory is that riskier assets generate higher returns.
Why DuPont (NYSE: DD) Is A "Buy"
As one of the largest chemical producers in the world, DuPont was hit hard in recent years. However, it was able to weather the storm and actually increase prices at a time when the competition was forced to cut them. Margins have gone up accordingly, and are well positioned to drive substantial free cash flow during a full recovery. At less than 14x past earnings, DuPont is cheaper than the S&P 500 on a multiples basis.
In the second quarter, DuPont's EPS came in above expectations, but the company still guided towards the low end of its previous guidance range. Performance chemicals saw a 9% increase in price, nearly offset a 10% decline in volume, which is important to note, since it further indicates DuPont's name as a cost advantaged producer. Pioneer represents a particularly attractive catalyst in light of improving productivity under a bullish corn and soybean environment.
With Dow (NYSE: DOW) trading at around 18x earnings, despite only being forecasted for 7.9% annual EPS growth over the next 5 years, the bar does not have to be high for the market to go wild on chemicals. Moreover, Dow has shown a series of operational problems, like during the second quarter when EPS came in 14.1% below expectations after several weak quarters. As the least able to handle input costs, Dow warrants multiples that are higher than DuPont's, which is the most able to handle this pressure.
Why Huntsman (NYSE: HUN) Is a Takeover Target
Whereas DuPont is undervalued in its own right, Huntsman is undervalued as a takeover target. By itself, Huntsman carries numerous concerns over margins and Ti02 profitability. Greater unemployment in Europe and uncertainty in Asia have led to multiples depressing substantially to less than 10x past earnings. However, this also has a created tremendous takeover opportunity for larger suitors.
It's not even that Huntsman is forecasted for double-digit annual EPS growth over the next half decade. It's not even that the company is looking to increase scale in methylene biphenyl diisocyanate to keep up with growing foam demand. It's not even that the company has consistently come out ahead of expectations. What really matters to a takeover artist is that the company's assets are worth much more than the sum of the parts. This will enable the buyout specialist to, if nothing else, sell off the assets to the growing chemicals market to capitalize off of a depressed market time period. A company can't do that quite as well.
With around a 5.8% short interest on the float, there is thus a strong potential for a squeeze. I believe that the firm's failure to hold up, albeit during a challenging period, also makes it a perfect candidate for shareholder activism. Unrest from current large shareholders could convince the company to take drastic measures to unlock value, even those that they are not ordinarily incumbent on, such as a sale.
TakeoverAnalyst 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.
