Methanex - Long-Term Opportunity, Or Musical Chairs?

Companies/stocks like Methanex (NASDAQ:MEOH) will earn you some early gray hairs. Methanex has long been the world leader in methanol production, with market share more than double its nearest competitor (depending upon how you treat state-owned businesses). What's more, while methanol prices and revenue have been endlessly volatile over the years, the company has always managed to generate positive EBITDA, nearly always managed to generate operating income, and typically generated positive cash flow, as well as strong returns on capital in the good years.

The problem is that this is a tough business in which to earn any sort of consistent return. Revenue actually shrunk over the last decade and EBITDA margins have swung between 5% and 30%, with long-term book value per share growth of just 3%. Looking ahead, demand for methanol in applications like fuel blending, biodiesel, and methanol-to-olefins, as well as growth in coatings, sealants, and other downstream markets, should be healthy, but I expect that state-owned enterprises in areas like the Middle East and China will be willing to add capacity in response.

Methanex's valuation is not so compelling to me, but historically these shares have done well in times of rising methanol prices. Hence the "musical chairs" part of this article's title - while I think supply curtailments and growing demand from applications like MTO can support higher spot prices (and strong cash flows for Methanex) from here, it won't go on forever and this is not a long-term buy-and-hold type of stock.

Continue here:
Methanex - Long-Term Opportunity, Or Musical Chairs?

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!