Diversifying: The chemicals sector
Vanina is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Some say that specializing on one product is the path to success. Others argue that diversifying is a very important characteristic during economic recessions. Neither is wrong, and an analyst has very well addressed the issue in his blog. Here, are three very important chemicals companies that started with one product company and today span over many industries, they are: DuPont (NYSE: DD), Air Products & Chemicals (NYSE: APD), and BASF (NASDAQOTH: BASFY.PK).
Diversifying to further improve
Base in Germany, BASF, is the world’s largest chemical company. The business operates in more than 80 countries, and holds around 400 production facilities worldwide. Its operations are divided among the following segments: chemicals, plastics, performance products, functional solutions, agricultural solutions, and oil&gas. More recently, the firm made the news because presence in China continues to grow.
In the short run, BASF is experiencing a pick up on the agricultural and oil&gas segments. However, difficulties derived from an adverse economic environment in Europe remain. For the long run, the company will continue to drive its portfolio away from cyclical commodities, acquisitions new operations and dropping non-performing ones. So, management expects to reduce exposure to market woes by growing activities in the specialty chemicals sector.
Financially BASF is very strong. Its balance sheet displays increasing revenues and cash flow for the last 3-years. Free cash has taken a hit in accordance with recent acquisitions and capital investments. During the same period, management took decisive steps to reduce debt. Last, operating margin in the last triennium does not present much changes and today stands at 11%.
Trading at 13.9 times its earnings, carrying a 27% discount to the industry average, with a 2.67% yield and $2.4126 dividends, and a price tag closer to the 52-week high, the stock is undervalued and enticing. It is recommended to BUY because BASF holds an enviable market position, will shortly built an economic moat, had the greatest net growth in the last 3-years of the industry, and management takes shareholders’ interests to heart.
Adjusting the scheme
Founded as a gunpowder producer, DuPont has grown into the third largest chemicals company in the world. Its products are present in the transportation, textile, construction, automotive, agricultural, hybrid seeds, nutrition and health, pharmaceuticals, packaging, and electronics markets. Most recently, the company announced the paint pigments segment would be divested.
At the moment, DuPont is searching for ways to curb titanium dioxide cyclicality, in order to ease its impact on revenues and sales. Additionally, the chemicals segment has performed below expectations, minimizing achieved improvements in the agricultural segment. Looking ahead, the company will continue to steer away from chemicals and increase its presence in the agricultural business. Last, management is expected to continue the firm’s history for introducing new and innovative products.
DuPont holds a strong balance sheet. Besides the slower performance experienced in 2012, revenues and cash flow are on a positive trend. Net income, meanwhile, remains stable. Debt, after a 4-year climb, started to decline last year and management hinted that further reduction is on the menu. On the other hand, operating margin has been on a declining trend through the last triennium, and today has sunk to 8.7%.
Currently trading at 21.9 times its earnings, packing a 14% premium to the industry average, a yield of 3.04% and dividends at $0.43, and a price tag close to the 52-week high, the stock in a bit overvalued but eye catching. It is recommended to HOLD until management sets performance on a clear upward trend, and internal restructuring proves to improve performance.
The third regional employer, Air Products, is based in Allentown, Pennsylvania. The firm is internationally known for producing gas and related products, as well as chemicals. Among its most notable products are: hydrogen and helium. Lately, the company made the news because performance during Q3 was affected by fewer polyurethane intermediates sales.
Today, Air Products is looking at a downturn on profits, higher operating costs, and possible divestures in order to boost performance. Ahead, long-term contracts, cost reduction policies, a leading position in the hydrogen segment, diversification improvements, and a growing demand for gas should fuel growth. However, a growing demand for cleaner energies may cut short profits from the hydrogen segment.
Finances for Air Products are moderate. Revenues experienced increments since 2009; however, it has not reached pre-recession levels. Additionally, cash flow stood stable, while free cash continues on a downward trend. On the other hand, debt has risen during the last 3-years, and equals today 50% of revenues. Last, operating margin never fell below the 10% mark during the last decade, and today stands at 14%, meaning a 2 points reduction from 2012.
Trading at 19.7 times its earnings, barely over the industry average, yielding 2.76% and paying $0.71 dividends, and a price tag very close to the 52-week high, the stock if fairly valued and tempting. It is recommended to HOLD until performance is improved, and shareholder’s interests are better taken into account.
I do not think that BASF is a much better company than DuPont or Air. But, when looking at its managerial structure it is clear that shareholders are held in high esteem. At the same time, the company has already concluded much of its internal restructure with great success. The positive results are evidenced on market performance, and that is why it is recommended over the other two.
Vanina Egea 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!