The Festive Friday Findings – December 22nd 2017
The Friday “Festive” Findings – December 22nd, 2017
Chart Of the Week
- Chart Of The Week
- E&C – Can Two Poor Companies Make A Good One – Probably Not in E&C
- ABB – Taking Out The Trash
- Huntsman – Moving On Appropriately
- Weekly Winners & Losers
“Tis the season” and so we thought we would try something seasonal. With a weather eye on GE, we decided to look at the performance of companies that have had absolute share price declines through the Christmas break in any year, to see whether there is predictive behavior for the last week of the year – i.e. is there last-minute tax loss selling – and also whether these stocks tend to bounce back in the first quarter of the subsequent year (first chart and Chart of The Week).
The answer is that there is no real answer – in aggregate the absolute declines continue and there is an aggregate bounce back in Q1; but the volatility around those two aggregate data points dwarfs the averages and so does not lead to any material investment conclusions – interesting none the less.
The volatility is in part because the underperforming group often contains material stocks that are levered to commodity cycles – both CF and FCX appear more than once, and the Q1 performance either continues a negative trend or shows a pronounced rebound – creating the large standard deviation. While that sounds like a compelling argument to isolate industrials from materials to take out the commodity risk, we get a similar looking chart – so much for that! (Second Chart)
In the third chart, we look at the outperformers for the year – the top ten in each year and look at their post-Christmas and Q1 performance. Here we get something more interesting as they have similar volatility, but materially underperform the poor stock group in Q1 in aggregate. (Third Chart)
The components of each group for 2017 are summarized in the 4th and 5th chart.
This week CBI and McDermott announced a merger of equals – perhaps an act of desperation or last resort on both parts. In a poor industry anyway, CBI and MDR are the poor performers, with CBI setting the standards for recent earnings misses, largely driven by failure to deliver projects on time and on budget in the US. While the combination is probably the right move, as the companies should at least be able to find a reasonable management team through the combination, we see two issues that will be hard to resolve:
- The skill shortage versus the demand; problematic across E&C in general which will not change – it will be made worse if we get an infrastructure bill.
- Moreover, acquisition/merger uncertainty is a great opportunity for poaching! All the E&C companies have skill shortages and both CBI and MDR may lose key people if they do not manage this deal and the integration very well.
- CBI appears to have messed up a number of “turn key” projects – there may be future costs associated with this, especially if their customers seek damages.
Neither set of shareholders likes the deal – we think that it is probably the right move for both companies as the alternate – of going it alone – is worse. Anyone holding out for a cash bid for one of the other by one of the larger companies has probably been drinking too much of the holiday spirit. The potential liabilities – both from work completed late and work on the books that they may not have the capacity to complete on time would be major red flags for any buyer. MDR probably has a better stand-alone story than CBI today, at the margin.
While GE appears to be sitting on its hands, wearing earplugs, another of its competitors is embarking on some significant restructuring moves. We are already seeing a rapidly moving Siemens, and ABB is adopting the “move quickly” model also, announcing cost cutting and significant JV’s as it tries to right size its various businesses for the likely demand environment of the future. It is possible that both ABB and Siemens are moving rapidly now because they know GE is distracted with its internal issues and not necessarily focused on the bigger industrial pictures – one fewer possible competitor for JVs and other M&A.
While GE appears to be doing nothing, it is possible that the company is hatching plans and that we will hear about some changes in Q1, but for now it appears as if the rest of the relevant group are ticking off dance cards, restructuring and forming alliances/JVs that may limit the options for a “late to the party” GE. As the worst performing stock of the year, there is an expectation for some sort of recovery in 2018, but this will not come if GE’s competitive landscape gets harder because of the moves of others and if GE misses out.
See recent GE research for more thoughts on what the company should do. Note that GE was the sixth worst performer in our group this week (missing the chart below by 20 basis points).
HUN was one of our favorite stories for 2017 a year ago as we saw improving fundamentals and a cheap stock. We dropped the recommendation with the Clariant deal as we felt that it benefitted the Huntsman family but neither group of shareholders – the stock stalled during this period – first chart. With the deal now off the table, investors are focused back on the HUN standalone story, which is a good one. Also, HUN and the family are moving on – which is also good.
- Jon Senior is stepping down as Chairman and handing the reigns to Peter – Jon would have stepped down had the Clariant deal gone through. Jon deserves to retire – he has been an industry icon since the 70’s and should celebrate creating something substantial from essentially nothing.
- Jon and the Family Trust have sold 500,000 shares over the last few week – $15 million – give or take. The endowment fund has also sold – in excess of 2 million shares. The Clariant deal would have made this less conspicuous, but we do not see this as a negative. The larger Huntsman family has much of its wealth tied up in a company that is important to some family members, but likely not all. This is not a loss of faith in the company by the family in our view, just prudent portfolio management and we expect to see more.
In the meantime, the company continues to do well and should also be an interesting story for 2018 as long as economic growth remains robust – HUN has leverage to the Airbus A350, which should ramp up production in 2018. We expect the polyurethane chain to do well in 2018, in addition to epoxies. The stock does not look cheap (second chart), but still has a positive skepticism index – suggesting that returns are ahead of value (third chart) and it has earnings momentum (fourth chart) and could see further positive revisions for 2018. While we are unlikely to see share price gains like we saw in 2017, there could easily be another 20-25% in the stock if the product demand pull remains strong.
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