Jon Huntsman, a Republican candidate for president of the United States, is regarded as thoughtful and moderate; he is trailing badly in the polls. Some say he is underrated – undervalued, even.
As it happens, Huntsman Corp., the Utah-based diversified chemical company founded by his father, is similarly undervalued: It has double-digit gains in revenue, a 4-per-cent dividend yield, and trades at just six times its forward earnings.
The difference between the two is that Huntsman Corp. seems much better positioned for gains over the next 12 months.
Huntsman Corp., despite its lack of name recognition, is a classic American entrepreneurial success story. Jon Huntsman Sr. invented the Styrofoam egg container as well as the "clamshell" packaging that houses millions of Big Macs. He built his company through dozens of debt-fuelled acquisitions, and came close to bankruptcy more than once. (A full accounting can be found in the June 18, 2010 edition of Fortune magazine, cnnmon.ie/bcw6rk)
Mr. Huntsman Sr. remains executive chairman and his son Peter Huntsman is chief executive officer. Peter Huntsman has been engaged in a multiyear process to get the company out of commodity chemicals and into higher-margin specialty products while at the same time paying down the company's debt. (At a debt-to-capital ratio of slightly more than two-thirds, Huntsman Corp. is the most-levered U.S. diversified chemical company, according to data from Standard & Poor's Capital IQ.)
These continuing efforts have created noise in Huntsman Corp.'s results, particularly in the most recent quarter: A $155-million (U.S.) restructuring charge for its textile chemicals business led to a $34-million loss. That obscured year-over-year revenue gains of 24 per cent and a gain in earnings before taxes of more than 50 per cent.
The knock on the chemicals business, Huntsman included, is potential problems from rising input costs; so far, the industry has shown the ability to pass along those increases to customers. In the three months ended in September, Huntsman Corp.'s average selling prices, company-wide, gained 20 per cent from the prior year.
A big contributor is titanium dioxide, a key ingredient in paint. Demand has increased and supply has been constrained. Analyst Laurence Alexander of Jefferies & Co. Inc. says the investment case for Huntsman Corp. is fundamentally a call on "the stability of elevated margins in the [titanium dioxide]industry," as well as the timing and strength of a construction recovery.
Indeed, the recent depressed prices in U.S. chemicals stocks suggest pessimism about the global economy. Mr. Alexander's "downside scenario" of a recession that wipes out Huntsman's sales growth, compresses margins, and sends annual earnings per share to 50 cents – well less than half the current level – could yield a $5 stock, versus the $9-to-$11 range of recent trades.
However, Mr. Alexander, who has a "buy" rating, is looking for 2012 EPS of $2.05 and an earnings multiple of just over of 10, yielding his target price of $21. This – his most-likely scenario – he says "is a blend of our trough and mid-cycle valuation estimates."
His "upside scenario" of robust demand and strong margins contributing to EPS of $3.50 and a 16 multiple could create a $56 stock (a return of more than 400 per cent from today's levels).
There are, to be clear, better-known names in the sector that are also trading at bargain prices. Dow Chemical Co. and E.I. du Pont de Nemours & Co. sport dividend yields around 3 per cent and forward P/Es of about 10.
Huntsman Corp., however, seems to have the potential to gain on the pack and be a winner by November, 2012 — even if Jon Huntsman, the candidate, does not.
Special to The Globe and Mail
David Milstead