Innospec In A Lull, But A Big Deal Can Drive Value

I liked Innospec (NASDAQ:IOSP) as a value play back in April, as I thought the Street was too caught up in the weakness in the Oilfield Services business and overlooking the long-term potential in the core Fuel Specialties and Performance Chemicals businesses, as well as the possibilities for value-creating M&A and an eventual recovery in the oil business. I didn't expect the stock to be this strong, though, with the shares up almost 40% since that last piece.

Innospec was doing pretty well on its own through August as margins were holding up better than analysts expected. The big jump came with the second quarter earnings, though, as the company announced the $200 million acquisition of Huntsman's (NYSE:HUN) European surfactant business. Although this business looks more commoditized than Innospec's Performance Chemicals business, there are opportunities here for cross-selling and margin improvement and this gives Innospec a European foothold that could prove more valuable in the years to come.

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Innospec In A Lull, But A Big Deal Can Drive Value

Seeking Alpha: BASF Has Lagged On A Relative Basis, But Excels On Its Own Merits

Chemical companies have been basking in some investor love, as companies like Dow Chemical (DOW), Wacker Chemie (OTC:WKCMY), Clariant (OTCPK:CLZNY), and DuPont (DD) have seen their shares rise from 26% to 53% over the past year. With that, the "fair" multiple on sales and EBITDA has risen more than 10% as investors bid up companies that are exposed to global growth and have succeeded in restructuring operations away from basic/commodity markets.

BASF (OTCQX:BASFY) is a tricky stock within that context. BASF is the largest chemical company in the world and a top player in numerous markets. The company also has above-average profitability despite a sizable ongoing commitment to R&D. Despite that, the shares have lagged, as the local shares (BAS.XTA) have risen less than 20% over the past year. Stretch out the comparisons to two or three years, though, and BASF's performance is much more competitive - suggesting that BASF was simply early in getting recognized for its qualities. BASF as a lot of positives from a qualitative standpoint, but it's tough to argue the shares are undervalued unless you believe that it's somehow "different this time" for chemical companies.

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BASF Has Lagged On A Relative Basis, But Excels On Its Own Merits

Seeking Alpha: Valhi Seems Like A Tough Way To Seek Value

Holding companies and conglomerates can offer investors an opportunity to take advantage of management expertise and invest in industries/markets that are otherwise difficult for retail investors to access. Companies like PICO Holdings (PICO), Cosan (CZZ), Brookfield Asset Management (BAM), Macquarie Infrastructure (MIC), and Sprott (SCP.TO) all offer that to some extent, while better-known names like Berkshire Hathaway (BRK.A) and Icahn Enterprises (IEP) could likewise be considered variations along that theme.

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Valhi Seems Like A Tough Way To Seek Value

Seeking Alpha: Taminco Isn't Your Typical Chemical Company

Specialty chemicals is a sector label that really doesn't tell investors all that much, as it includes a wide range of companies with very different end-markets and operating characteristics. That said, specialty chemicals do usually stand out as having above-average full-cycle returns than more commodity-oriented chemical companies. With that backdrop, I think Taminco (TAM) is worth a closer look as a pretty special specialty chemical company.

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Taminco Isn't Your Typical Chemical Company

Investopedia: DuPont's Cyclicality Seems Overpriced

It seems like there is a segment of the investment community that is committed to believing that DuPont (NYSE:DD) will eventually figure out the right mix of businesses that will let it transcend its historical cyclicality and volatility. To be fair, management at DuPont has always been willing to move into higher-potential areas like agriculture, performance materials, and nutrition, but these efforts have never managed to decouple the close correlation of the company's performance and global GDP growth. Accordingly, I'm not sure I'd want to pay a premium to buy these shares.

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Investopedia: Transformation Has Paid Off For Ashland

When investors consider why companies such as Albemarle (NYSE:ALB), PPG (NYSE:PPG) and Huntsman (NYSE:HUN) go about the process of remaking themselves, a quick look at Ashland (NYSE:ASH) may offer some explanation. Once largely a refining and marketing company, Ashland has remade itself into a diversified specialty chemicals company. Now the question is whether this transformation can lead a company with perpetually poor free cash flow conversion and returns on capital to better results over the long term.

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Investopedia: Should Huntsman Really Be Trading At Such A Discount?

Relative performance can be a tricky metric to use when assessing whether a particular company's stock is getting its due in the market; significant factors like debt, margins and management's competence all make a difference. Nevertheless, the valuation on Huntsman (NYSE:HUN) puzzles me a bit, especially in relation to other chemical companies such as Albemarle (NYSE:ALB), Ashland (NSYE:ASH), Dow (NYSE:DOW) and BASF (OTC:BASFY). Although Huntsman has not fully executed a transition to a specialty chemicals company and there is a lot of debt here, this could be an interesting name to watch.

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Investopedia: Rockwood Has Its Risks, But Also Some Apparent Value

It's hard enough to own a chemical company today, with the volatility in input costs and the wobbly state of the global economy. Factor in a sizable sales exposure to Europe, and it's not exactly surprising that Rockwood Holdings (NYSE:ROC) is off its best levels. Nevertheless, with solid exposure to growth markets like lithium and advanced ceramics, and management's plans to monetize non-core assets actively, these shares may be worth a look for investors that are more aggressive.

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Seeking Alpha: Seeds And TiO2 Tiding DuPont Over For Now

I was surprised to see relatively little coverage of DuPont's (DD) earnings on Seeking Alpha. This is, after all, one of the largest American companies, a Dow Jones Industrial component, and a major bellwether in multiple industries. All told, then, a stock worth following. So, once more into the breach ...

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Seeds And TiO2 Tiding DuPont Over For Now

Investopedia: Industry At A Glance - Specialty Chemicals

The chemicals industry is one of the most economically-sensitive industries around, and many of the major chemical companies are very nearly proxies for global GDP growth. Specialty chemicals, though, is a subsector with some notable differences. It is certainly not fair to say that these companies are neither cyclical nor invulnerable to global growth trends, but many of these companies offer products or serve niches that tend to be a little more stable.


There are ample worries about growth in the market today. If the economy is truly headed into a double-dip recession, these companies are not going to be notable outperformers. On the other hand, many of these stocks have been hit on growth worries and investors may find that these companies have either been sold too far, or at least merit spots on watchlists for the recovery in growth expectations.

Air Products (NYSE:APD)
If you want hydrogen or helium, there's a good chance you'll do business with Air Products. APD is a global leader in atmospheric and process gasses. These are critical inputs in many industrial and manufacturing processes and there are substantial advantages to scale and scope. That said, APD has about 20% exposure to the electronics industry (good in most periods, but arguably a negative today) and the company's profitability goals for 2015 are starting to look a little too ambitious. That said, the stock looks undervalued today and a 3% dividend yield is not a bad sweetener.




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Investopedia: Buffett Brings Lubrizol Into The Fold

Buffett-spotting is practically a cottage industry in the financial media, as is predicting the next thing that the Berkshire Hathaway (NYSE:BRK.A) CEO is going to buy. These predictions tend to be consistently off the mark, though, and so there is almost always an element of surprise to Buffett's next buy. So too was it with Monday's announcement that Berkshire Hathaway would acquire Lubrizol (NYSE:LZ) - while the deal makes a great deal of sense, precious few people were publicly predicting this one. (Check out some of Buffett's other surprise picks in 4 Lesser-Known Companies Buffett Owns.)

Berkshire Hathaway Buys Lubrizol  

Buffett is striking the kind of deal here that he prefers - an all-cash transaction for 100% control. Berkshire Hathaway will be paying $135 per share in cash for all of Lubrizol's outstanding shares. Including Lubrizol's net debt, this is a $9.7 billion transaction for Berkshire Hathaway - and a 28% premium for Lubrizol shareholders. All in all, shareholders who bought or held Lubrizol through the worst of the recession have seen these shares come back more than fives times over since early 2009.

What Berkshire Hathaway Is Getting 

Lubrizol is a chemical company, but it is not so much a commodity player like Huntsman (NYSE:HUN) or Westlake (NYSE:WLK). Instead, Lubrizol focuses on additives and advanced materials. Lubrizol has a leading share in additives for products like motor oil, gear oils and transmission fluids, as well as significant businesses in engineered polymers, performance coatings, and so on.

Although many chemical companies struggle to attain a double-digit return on equity, let alone maintain it, Lubrizol has done quite well by this metric. Likewise, although Lubrizol was not immune to the effects of the recession, the company has shown a relatively uncommon ability to deliver consistent revenue growth compared to other chemical companies. (For more, see How Return On Equity Can Help You Find Profitable Stocks.)

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Investopedia: DuPont Nets Out To Lukewarm

The good news about DuPont (NYSE:DD) is that it is not just some commodity chemical player, forever at the mercy of cycles it cannot control. No, DuPont is a highly-diversified player in a wide variety of businesses, many of which are either counter-cyclical to each other or not especially cyclical at all. Well, in point of fact that is actually both good news and bad news - for while DuPont has enough diversification to smooth out some of the worst of the cyclical swings, it also has enough diversification to tone down even hot segments to an overall level of lukewarm. 

A Good Enough Finish to the Year
Even DuPont's fourth quarter earnings were an exercise in good news and bad news. To the good, the company reported that sales climbed 15% to about $7.4 billion - a fine performance that surpassed even the highest estimates. Growth was fueled in part by double-digit volume growth, and the company saw strength in the U.S., Asia and Latin America.

Unfortunately, the company did not do nearly so well on its profitability. The company did okay at the gross margin level, but operating income was a little disappointing. Moreover, while the company did beat the average estimate by 18 cents, 15 cents of that came from an unexpectedly low tax rate. Consequently, a much better top-line performance delivered only three extra pennies of earnings. Not exactly an exciting result.

Looking at the segments, some of the trouble becomes more apparent. Revenue in the sector was up a solid 13%, but the company actually worsened its operating loss from a year ago. Although the company did see very solid operating leverage in electronics and communications and performance chemicals, businesses like Performance Coatings and Safety/Protection weren't so exciting. Some of the trouble was due to input costs, ironic in a sense given that DuPont is so often grouped with those basic input producers.


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http://stocks.investopedia.com/stock-analysis/2011/DuPont-Nets-Out-To-Lukewarm-DD-DOW-HUN-ALB-OXY0126.aspx

The Good and Bad of DuPont's Strength

If no good deed goes unpunished, then maybe it is true that good news from DuPont (NYSE:DD) can often come with a catch. While DuPont is a highly diversified chemicals and materials company, the company's products are all largely inputs for other companies' products. This sets up the good news/bad news dilemma - solid volume growth at DuPont should be reasonable confirmation that economic growth really is recovering, but solid price growth also points to the risk of oncoming cost-push inflation.

DuPont's Third Quarter
DuPont disappointed no one with its sales performance in the third quarter, as revenue rose 17% and surpassed even the highest published analyst estimate. Growth was fueled both by mid-teens volume growth (14%) and mid-single digit price growth (5%).

This revenue growth was not necessarily balanced, however. Agriculture and coatings grew by single-digit amounts (and had the lowest volume-based growth), while electronics, chemicals, materials, and safety/protection all grew in excess of 20% (and all had volume growth above 15%).


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http://stocks.investopedia.com/stock-analysis/2010/The-Good-And-Bad-Of-DuPonts-Strength-DD-HUN-MRK-ALB-STP-JASO-DOW1028.aspx

A Few Fruits From This Week's Research

When you're a stock junkie (to say nothing of a financial writer), you're pretty much always doing stock research. Sometimes you go a while before finding good ideas, and then sometimes you find them in bunches.

This week turned up a few interesting tidbits, as I was looking mostly at the chemicals sector.

Goodyear (GT) - Analysts seem to like this one, and it was up more than 10% in the past week. But a tire company? Really? Sure, the EV/EBITDA ratio isn't bad, but this company's historical ability to produce real returns (ROIC) isn't very good.

Aceto (ACET) - I like the idea of a company that makes the chemical underpinnings of pharmaceuticals, particularly generics. By and large, these guys don't mess with the legal patent wrangling like a TEVA. The EV/EBITDA is on the high side, but this one looks interesting.

Calgon Carbon (CCC) - Wow. Great business and decent returns on capital, but a pretty poor long-term record of growth and doesn't look at all cheap to me (though the analysts seem to like it well enough).

Hexcel (HXL) - Nice story (carbon fiber for Boeing and Airbus), but I can't even get close to making this one work on a valuation basis.

Lubrizol (LZ) - Am I the only one who didn't know this company was producing double-digit ROICs, good growth, and a strong free cash flow yield? Unfortunately, as much as the company looks like a winner, the stock seems to be there already.

Metabolix (MBLX) - You either win big or lose big. It's a nice idea, making plastics out of corn, switchgrass, and the like, but valuation is an exercise in faith. Treat it like a biotech. I probably should go back and double-check the IP here, because that will be the real deciding factor.

Methanex (MEOH) - I was shocked at how cheap this one looks when I value it by a forward EBITDA basis. It's been a volatile commodity business in the past, but they have a lot of unused capacity (good for margins if volumes go up) and China seems poised to use a lot more methanol.

Sigma Aldrich (SIAL) - Great company. No bargain in the stock, though.

Huntsman (HUN) - Hmmm. This one could be interesting. It's a diversified chemicals business, but a little less commoditized than your average commodity business. This one could be worth a closer look.

Landec (LNDC) - This was a popular "little known" growth stock a few years ago. It was supposed to be a company that "looked like a commodity business, but really wasn't". Guess what? It was. At least enough to knock the wind out of its sales. I'm intrigued, though, and if my numbers are right this could be a cheap one.

And so ends the gleanings from this week's research. There were a lot more names I looked at, but I feel like 10 at a time is about all anybody wants to read about.

Happy hunting!