Absolutely Fabulous – 5 Chemicals Stocks That Are Cheap In Absolute Terms

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Graham Copley / Nick Lipinski

203.901.1629/203.989.0412

gcopley@/nlipinski@ssrllc.com

February 8th, 2018

Absolutely Fabulous – 5 Chemicals Stocks That Are Cheap In Absolute Terms

  • EMN, MOS, CF, DWDP, and…SHW? are our five best ideas in the Chemicals space that are cheap on an absolute basis rather than a relative basis.
    • For the most part these companies have not sold off as much as the market, but we still think they are interesting stocks for 2018 and do not have the multiple risk attached to others.
  • EMN has been on our favorites list for a couple of years simply because it is cheap and has earnings momentum – operating leverage in products that are levered to improving GDP.
    • Complex – few understand the company and the company does a poor job of helping.
  • MOS and CF are both very cheap fertilizer stocks suffering from a weak farm economy and global product oversupply. Both have material upside if commodity pricing can normalize – and while this could be a 2018 event, we think that 2019 is more likely.
    • The stocks could work in 2018 in anticipation of 2019 recovery.
  • DWDP falls into the cheap bucket by virtue of the higher earnings power we have in our model from the synergies that the deal is expected to deliver. If we did not assume the synergies we would include the company in this group.
    • This is one of our favorite stories for 2018 and we have written at length – see links below.
  • SHW is an interesting inclusion and it spits out of our “normal value” model because of the massive increase in its capital base following the Valspar acquisition.
    • This was the thesis behind our SWK recommendation 3 years ago – the differences: SWK had a history of deal integration, but they did add as much goodwill (proportionately).
    • If SHW can elevate returns close to historic averages or the historic trend, earnings have considerable upside. This may be hard from a mix perspective, but even a partial improvement would suggest 2018/19 estimates have some room.

Exhibit 1

Source: Capital IQ and SSR Analysis

Details

In a volatile broader market and a risk that the market multiple might shrink, we highlight 5 chemical names that appear cheap on an absolute basis rather than a relative basis.

Note that after yesterday’s underperformance OLN now also appears below its longer-term P/E, but OLN appears to be a victim of the new tax rates rather than a beneficiary and the current discount is not enough to offset that in our view.

Exhibit 2

Source: Capital IQ and SSR Analysis

Exhibit 3

Source: Capital IQ and SSR Analysis

EMN

Relevant Research:

Exhibit 4

Source: Capital IQ and SSR Analysis

Exhibit 5

Source: Capital IQ and SSR Analysis

Exhibit 6

Source: Capital IQ and SSR Analysis

MOS & CF

Relevant Research:

Exhibit 7

Source: Capital IQ and SSR Analysis

Exhibit 8

Source: Capital IQ and SSR Analysis

Exhibit 9

Source: Capital IQ and SSR Analysis

Exhibit 10

Source: Capital IQ and SSR Analysis

Exhibit 11

Source: Capital IQ and SSR Analysis

Exhibit 12

Source: Capital IQ and SSR Analysis

DWDP

Relevant Research:

Exhibit 13

Source: Capital IQ and SSR Analysis

Exhibit 14

Source: Capital IQ and SSR Analysis

Exhibit 15

Source: Capital IQ and SSR Analysis

SHW

Relevant Research:

While it unlikely that an Sherwin Williams plus Valspar can return to the historic SHW return on capital trend, the current returns also look unlikely, suggesting that forward earnings are too low and that we will continue to see upward surprises. The risk is that the company fails to execute the integration well and the chart below corrects, but because of a major goodwill write down. We remain very cautious on the fundamentals of the coatings sector, though less so on decorative in the US than Auto OEM globally.

Exhibit 16

Source: Capital IQ and SSR Analysis

Exhibit 17

Source: Capital IQ and SSR Analysis

Exhibit 18