BASF Not Getting Much Credit For An Upcoming Cyclical Recovery, Nor Its Self-Improvement Initiatives

As well-regarded as BASF (OTCQX:BASFY) is from an operational perspective, it hasn’t done its shareholders all that much good – over the last 10 and 15 years, the annual total return has lagged its peer group by more than 450bp and 150bp, and the gap to the S&P 500 is even larger. That’s even more frustrating considering the efforts management has undertaken to refine the business, buying and selling businesses to shift the mix to a less cyclical, higher-margin specialty weighting.

I believe track records are important, but only to a point. BASF management is going through a cyclical downturn now (exacerbated by COVID-19) and a capex reinvestment cycle, neither of which are great news, but the company is also going through a EUR 2 billion restructuring/self-improvement program, and I believe the share price doesn’t adequately reflect the potential upside to the restructuring and the company’s enhanced leverage to agriculture, EVs, and specialty niches in health, nutrition, coatings, and other segments. If BASF can generate long-term revenue growth around 3% and produce long-term FCF margins only slightly better than historical averages (and a greater skew toward specialty products should help), I believe these shares offer double-digit upside today.

 

Click here to continue:
BASF Not Getting Much Credit For An Upcoming Cyclical Recovery, Nor Its Self-Improvement Initiatives

Innospec Offers More Upside On Growth And Margins

The last year or so has been a choppy one for Innospec (IOSP), as volumes and price/mix have been choppy across the business and the company absorbs the lower-margin business it acquired from Huntsman (HUN) at the end of December 2016. As far as peer comparisons go, Innospec is a tricky stock to benchmark given its mix of businesses, but I’d call its performance since October of 2016 “middle of the pack,” with companies like NewMarket (NEU) and Solvay (OTCPK:SOLVY) doing worse and companies like Ecolab (ECL), BASF (OTCQX:BASFY) and Lonza (OTCPK:LZAGY) doing better.

Looking ahead, I believe it will be quite a while before the electric vehicle revolution materially impacts the fuel specialties business, and I think the company has a long growth runway for its performance chemicals business. Its oilfield chemicals business should continue to benefit from improving U.S. onshore activity, while the octane additives business will continue to exist in a regulatory twilight zone.

If Innospec can generate mid-single-digit revenue growth and drive FCF margins back toward 10% on sustained improvements in the performance and oilfield chemical businesses, a fair value in the low-to-mid $70s seems reasonable and can support a long position today.

Read more here:
Innospec Offers More Upside On Growth And Margins

Monsanto Ending On A Position Of Strength

For a company that has been around for a while and leads its industry, there’s an odd cyclical quality to Monsanto (MON) where sell-side analysts seem to get ahead/behind of the company’s growth curve, leading to multi-quarter periods of out/under-performance relative to expectations. Monsanto looks to be late in the game with another outperformance cycle, but that likely matters much less now that the company should be approaching the end of the line as a publicly-traded company.

It remains to be seen if Bayer (OTCPK:BAYRY) will get all of the final approvals it needs to acquire Monsanto. No insurmountable obstacles have appeared yet, but there is still a risk that regulators could dig in their heels and/or demand concessions that Bayer finds unacceptance. Although there’s still about 5% upside between today’s price and the deal price, that’s not really out of line relative to the remaining risk (and time). Consequently, I’m more inclined to look for the exit with my Monsanto position and find new investment ideas.

Read the full article here:
Monsanto Ending On A Position Of Strength

Covestro Benefiting From A Cyclical Surge, But Trouble May Be Looming

Germany's Covestro (OTCPK:COVTY) (1COV.DE) is a pretty interesting story to me. Nobody disputes that this is one of the largest manufacturers of key chemicals like polyurethanes, polycarbonates, and specialty inputs like isocyanates. Nor does anybody dispute the ongoing long-term growth potential in markets like autos, construction, appliances, and furniture, as polyurethane and polycarbonate products offer meaningful performance advantages (insulating ability, weight, etc.).

What is very much in dispute is how much longer the good times can last. Covestro has benefited significantly from higher spreads fueled by good market growth, relatively sluggish recent capacity growth, and outages across the industry. Now, though, a fair bit of new capacity is soon to go online and is threatening to push industry operating rates down to a point where pricing will weaken.

That Covestro will see a cyclical decline seems all but assured, but the timing, depth, and length of the downturn are far less certain. Although the shares look potentially undervalued on the basis of EV/EBITDA, I've seen enough cyclical swings to know that the virtues of Covestro will be forgotten by the market if/when that cyclical decline materializes. With that, I'd rather wait for a pullback below my DCF-based fair value (which does attempt to model some cyclicality) to build a position.

Read more here:
Covestro Benefiting From A Cyclical Surge, But Trouble May Be Looming

A Growing Specialty Mix And Improving Acrylics Bode Well For Arkema

France's Arkema (OTCPK:ARKAY) (AKE.PA) is far from unusual in trying to shift away from commodity chemical businesses in favor of specialty businesses with higher margins and less competition, but the company has nevertheless done a good job of making that shift. I believe that at least 70% of the company's earnings can now legitimately be said to come from specialty businesses, and it has the opportunity to buy its way toward an even richer mix.

In addition to the better growth and margin potential of specialty businesses like adhesives and sealants, Arkema's commodity acrylics business could be looking at a cyclical improvement in the coming years. Looking at the cash flow potential of the business, the shares look as though they could be 5% to 10% undervalued, which I believe is enough in this market to merit a closer look. I would note that Arkema's U.S. ADRs aren't as liquid as an investor might like though, and so I'd suggest at least considering the Euronext-listed shares.

Read the full article here:
A Growing Specialty Mix And Improving Acrylics Bode Well For Arkema

Valuation Complicates An Otherwise Interesting Story At W.R. Grace

W.R. Grace's (NYSE:GRA) shares have enjoyed a healthy valuation for most, if not all, of the time since the company emerged from bankruptcy, and that probably explains at least some of the underperformance relative to other specialty chemical companies like Albemarle (NYSE:ALB), BASF (OTCQX:BASFY), and Evonik (OTCPK:EVKIF) over the last few years. And that's the problem with valuation - there is a lot to like about W.R. Grace, one of the leaders in an oligopolistic sector and a chemicals company with uncommonly good margins, but it takes some stretching to drive an attractive fundamentals-based fair value.

Read more here:
Valuation Complicates An Otherwise Interesting Story At W.R. Grace

Monsanto Facing Some Hard Decisions

When I last wrote on Monsanto (NYSE:MON), I thought the company was still in for some rough quarters as corn prices continued to weaken, but that M&A chatter would continue to swirl. And that's exactly what has happened.

Monsanto's financials are wilting in the face of weak corn prices and more aggressive discounting from rivals, but Bayer (OTCPK:BAYRY) has come forth as a bidder for the company. Bayer hasn't come forward with an especially strong bid, though, and it remains to be seen whether Monsanto can coax a more appropriate bid from Bayer, get BASF (OTCQX:BASFY) involved, perhaps have another go at Syngenta (NYSE:SYT), or go it alone and deliver the benefits of its strategic partnership strategy.

On its own merits, I think Monsanto is at its fair value, as I do believe the soy business will start delivering in a big way and that the company has some high-potential pipeline projects reading to deliver in the coming years. While a bid from Bayer of $130 or higher would obviously represent upside, there is the risk that Bayer walks away or that the company pursues an alternative (like a venture with BASF) that may be worth more in the long term, but will require a great deal more patience.

Read more here:
Monsanto Facing Some Hard Decisions

Seeking Alpha: Innospec Muddling Through Better Than Most

Small specialty chemical company Innospec (NASDAQ:IOSP) continues to operate pretty strongly despite headwinds that would (and have) smacked other companies hard. Back in May of 2015, I thought the valuation was a little iffy and that it would be best to wait for a pullback; the shares did pull back into the low $40s in late summer before an impressive run to almost $60. Then the weight of weakness in the oilfield really hit the stock, sending the shares back down almost where we started from back in May of 2015.

It's probably too much to hope that Innospec sees its oilfield chemicals business return to growth this year, but the business has remained profitable and likely will stay so long as conditions don't worsen (another oil price pullback to old lows). Meanwhile, I think the fuel additives business will continue along while the performance chemical business grows nicely with strong volume growth driven by the personal care segment. With a clean balance sheet, and a stated desire to do more deals, I'm tempted to look past what will be a tough 2016 and pick at these shares now that they once again appear undervalued.

Continue reading here:
Innospec Muddling Through Better Than Most

Seeking Alpha: Monsanto Making Do, But It's M&A That Everyone Seems To Want

Given the recent announcement of the intention of DuPont (NYSE:DD) and Dow (NYSE:DOW) to combine their operations and Syngenta's (NYSE:SYT) apparent increased willingness to at least consider M&A offers, the question of consolidation in the ag business seems to have rendered Monsanto's (NYSE:MON) near-term performance largely moot. Given the weakness in the ag sector, and ongoing softness in corn prices, that might not be such a bad thing.

I continue to believe that Monsanto is a solid long-term holding in the ag space. The stock is modestly undervalued and carries less operating risk than many cheaper-looking ag stocks. I also continue to believe that Monsanto will find a seat in this game of ag musical chairs, but there is definitely a risk that Monsanto either has to settle for something less than its first choice (or second...) or pay more than it would like to.

Continue here:
Monsanto Making Do, But It's M&A That Everyone Seems To Want

Seeking Alpha: FMC In The Right Businesses, But The Valuation Could Be Better

FMC (NYSE:FMC) has been making a lot of smart moves to better position the company for above-average long-term growth in multiple attractive specialty chemical markets. The Cheminova deal wasn't cheap, but added good diversification and offers expense-driven synergies, while the sale of the alkali business came at a better than expected price. Longer term, it's hard not to like crop protection, health/nutrition, and lithium.

I wasn't thrilled with FMC's valuation back in April of 2014, and the shares have fallen almost 30% since then, underperforming BASF (OTCQX:BASFY), Bayer (OTCPK:BAYRY), Dow (NYSE:DOW), and Monsanto (NYSE:MON) over that time. I'm still not enamored with the valuation today, but I do believe there is an opportunity for the company to outperform on both sales growth and margin leverage.

Read the full article here:
FMC In The Right Businesses, But The Valuation Could Be Better

Seeking Alpha: BASF Continues To Execute A Proven Plan

BASF (OTCQX:BASFY) remains what it has long been - a very large, very diversified, and very well-run chemical conglomerate. A year ago I thought the shares didn't look all that promising on a risk/return basis and the ADRs have since underperformed (down about 21%) as have the local shares (BAS.XE) (down about 4%). DuPont (NYSE:DD), Dow (NYSE:DOW), Bayer (OTCPK:BAYRY), and Clariant (OTCPK:CLZNY) all would have given you a better capital returns performance, though all but DuPont have performed pretty well on a year-to-date basis.

For all of the fine attributes I see in BASF, I still can't get that excited about the shares today as a new money investment. Monsanto's (NYSE:MON) aggressive pursuit of Syngenta (NYSE:SYT) could very much work in BASF's favor, but against that upside are risks and concerns tied to growing global capacity in may of BASF's product categories and efforts by rivals in Asia to move further along the value curve. There are worse things than owning fairly-valued shares of a very good company, which I believe BASF is, but I'm not so excited about the valuation that I want to rush out and buy the shares.

Read the full article here:
BASF Continues To Execute A Proven Plan

Seeking Alpha: Innospec Continuing To Build A Quality Business From A Small Base

While Innospec's (NASDAQ:IOSP) foray into oilfield chemicals has run smack into price-related activity declines in North America, this small specialty chemical company continues to leverage a strong fuel additives business and a growing value-added personal care performance chemicals business. With the balance sheet flexibility to add more specialty business lines and a reasonable valuation, this company should still be look forward to above-average growth and margin leverage prospects.

Read the full article here:
Innospec Continuing To Build A Quality Business From A Small Base

Seeking Alpha: Taminco Should Be Switching Over To Cash Generation

The ag chemical market has slowed, as seen recently at FMC (NYSE:FMC) and DuPont (NYSE:DD), but Taminco's (NYSE:TAM) strong market share and diverse end markets for its alkylamine products are serving the company pretty well. The shares have done okay since my mid-February write-up, rising about 10% and doing pretty well relative to direct rivals like DuPont and BASF (OTCQX:BASFY) and the Dow Jones Specialty Chemicals Index. I continue to believe that Taminco is a solid specialty chemical company with better growth and return on capital prospects than its peers, not to mention deleveraging potential, but the valuation is creeping up a bit and this looks more like a "buy on weakness" than outright buy right now.

Follow this link to the full article:
Taminco Should Be Switching Over To Cash Generation

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.

Please continue here:
BASF Has Lagged On A Relative Basis, But Excels On Its Own Merits

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.

Follow the link to continue:
Taminco Isn't Your Typical Chemical Company

Seeking Alpha: The Street's Ag Blues Seem To Be Weighing On American Vanguard

This has been a frustrating year for American Vanguard (AVD) and its shareholders. While the stock has done a fair bit better than fertilizer names, it has absolutely lagged other crop-related stocks like Monsanto (MON), DuPont (DD), and FMC (FMC). Bad weather hit the company hard around mid year, and even though results (and the stock) have recovered since, the damage was already done.

In my view, American Vanguard's prospects and appeal as a stock have a lot to do with your time frame. It looks as though the company is going to go into next year with more inventory than normal, but the Street is already well aware of this issue. There are also more rumblings about competition, but I have to wonder if this is a real change in philosophy on the part of major chemical companies or more of a passing fancy. American Vanguard does seem undervalued today, at least enough so as to deliver an expected long-term return in the double-digits, but with the markets turning skittish on the ag sector, this is likely only a good name for more patient investors.

Continue here:
The Street's Ag Blues Seem To Be Weighing On American Vanguard

Seeking Alpha: Innospec Looking To The Next Run

Specialty chemical company Innospec (IOSP) has been quite the stock over recent years. Up almost 40% over the last year, over 60% over the past two years, and over 600% over the last five years, Innospec has done a good job of leveraging its solid share in fuel additives and surfactants used in personal care products. Along the way, Innospec has also uncovered a pretty interesting growth opportunity in drilling/oilfield chemicals that could ultimately increase its addressable revenue opportunities by several times.

The only "but" in the story is the valuation. As strong as the markets have been, this is a familiar lament (particularly from value-oriented investors like me) and certainly not exclusive to Innospec. On one hand, I do recognize that this company is well-positioned to out-grow the average specialty chemicals company and continue to generate good margins and returns on capital. On the other hand, you do have to stretch the growth estimates and/or multiples to generate an attractive price target today.

Please continue reading here:
Innospec Looking To The Next Run

Investopedia: Why Is Monsanto Evil, But DuPont Isn't?

As I explored almost a year ago in the case of Wal-Mart (NYSE:WMT) and Amazon (Nasdaq:AMZN), public perception is a curious thing. Two companies can do many of the same things, and yet one will take a much larger amount of flack and criticism for it. Or, as the Seattle Organic Restaurants website says, “the difference between a rainforest and a jungle is that a rainforest has a PR agent”.

To that end, I find it very interesting that Monsanto (NYSE:MON) is one of the most-hated companies on the planet, with the internet and social media full of stories and passed-around memes that declare it to be one of the worst companies in the world. And yet, DuPont (NYSE:DD) is just as big in genetically-modified seeds and agricultural chemicals, and pursues largely the same policies as Monsanto with respect to pricing, IP enforcement, and so on.

So it merits the question – Why is Monsanto evil, but DuPont isn't?

Please read the full piece here:
http://www.investopedia.com/articles/investing/061913/why-monsanto-evil-dupont-isnt.asp

Investopedia: W.R. Grace - Maybe The Most Valuable Bankrupt Company Going

While individual/personal bankruptcy is pretty straightforward, the same cannot be said for corporate bankruptcy. Airlines go through bankruptcy seemingly about as often as most people buy and sell cars, while in other cases bankruptcy is the end of the story – whatever assets are worth something are sold off and the company ceases to be.

Then there's the case of W.R. Grace (NYSE:GRA). Technically in bankruptcy, Grace did not go into bankruptcy because of any flaws in its core business, but rather the rapidly-accelerating and virtually uncontrollable costs of settling asbestos litigation. With a valuable catalyst business, a stable coatings business, and a construction products business leveraged to a recovery, Grace is most definitely a going concern. On the other hand, a better-than-60% jump in the stock over the past year and a nearly 20-fold increase from the 2009 lows seems to already recognize the ongoing value in this business.

Please follow this link to continue:
http://www.investopedia.com/stock-analysis/061813/wr-grace-maybe-most-valuable-bankrupt-company-going-gra-alb-dow-rpm.aspx

Investopedia: Mead Johnson Nutrition's Valuation Looks Bloated

Investors are almost always willing to pay up for growth, particularly when it's in a sector where growth can otherwise be hard to come by. But Mead Johnson Nutrition (NYSE:MJN) shares seem to take that a little too far. There's no arguing that the company's heavy exposure to faster-growing emerging markets is a big plus, not to mention its strong share in what is effectively becoming a global oligopoly. Even so, investors shouldn't ignore the risk of further margin pressure and the possibility that they're paying too much for these shares.

To read more, please follow this link:
http://www.investopedia.com/stock-analysis/2013/Mead-Johnson-Nutritions-Valuation-Looks-Bloated-MJN-ABT-NSRGY-DF0205.aspx