Huntsman rationalizes his P

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Last February, the price of Huntsman Corp. (HUN, Financial) was just over $40; about eight months later, the price is $25.50 (close October 10). Like many other companies, its price has been eroded by the forces of the general market decline.

Its price has fallen despite strong quarterly results, making it a potential candidate for investors who like to fish the bottom. The slippage also means investors are now receiving a dividend of over 3%, while at the same time the company is aggressively buying back its own shares.

About Huntsman

The company defines itself as “a global manufacturer of differentiated organic chemicals. Our products include a wide range of chemicals and formulations, which we market globally to a diverse group of consumer and industrial customers.

In its 10-K for 2021, it went on to report that its products are used in many applications, including those in “adhesives, aerospace, automotive, construction products, durable consumer products and non-durable, electronics, insulation, medical, packaging, coatings and construction, power generation, refining, synthetic fiber, textile chemical and dyestuff industries.

This slide, from his presentation at the Jefferies Industrials conference on August 10, shows how his products are grouped:

Note the darkening of the Textiles Effects column, as it is on sale. It’s one of the changes underway at Huntsman as it strives to create what it calls “a simplified, higher-value portfolio.” The company goes on to explain that the transition is focused on growing its Ebitda margin and converting free cash flow.

Competitors

Competing companies vary by product group. For example, BASF (BASF), Covestro (COVTY, Financial), Dow (DOW), Lubrizol (delisted) and Wanhua Chemical Group also produce polyurethane chemicals. In its downstream markets, Huntsman faces competition from Carlisle (CSL, financial), Coim (CMMRF, financial) and Kingspan (KGSPY, Financial).

According to Huntsman’s annual filing, the polyurethane chemicals industry has two competitive aspects:

  • If the price is the dominant factor, it is differentiated by a high level of customer support.
  • When price is not dominant, it competes on product performance, its ability to respond quickly to customer needs and provide innovative solutions.

Its competitive strategy seems to be working; it has a solid net margin that is roughly double the chemical industry median.

Over the past five years, its performance has been close to that of its industry peers and slightly below the S&P 500:

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Financial solidity

The company received a rating of 7 out of 10 for its financial strength.

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Is debt a problem for Huntsman? Probably not, even though the Altman Z-Score is 3.09, which is barely in the safe zone (0 to 1.7 is in the distress zone, while 1.8 to 3 is the zone grey).

The company has a reasonable interest coverage ratio, indicating that it has enough operating income to pay 18 times its interest expense. Also, don’t overlook the Piotroski F-Score, which is a total of 9 out of 9, indicating excellent management of the company’s finances.

By company policy, it has a debt target, as this slide from its investor presentation shows:

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The company’s financial strength depends on its ability to continue to create value. The weighted average cost of capital is 7.65%, for a return on invested capital of 13.93%.

Profitability

Huntsman’s profitability also fared well with a rating of 8 out of 10.

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Huntsman’s net margin compares well to its peers and competitors in the chemical industry. While the industry average is 6.81, the company’s net margin is 13.45%.

It also enjoys a leading position in the industry when return on equity is taken into account. A return on equity of 30.85% is very good, but there is a significant difference between its ROE and its return on invested capital (the first corresponds only to the equity contributed by the shareholders, while the second includes at the both shareholder contributions and borrowed capital).

And although the company only scores one out of five for predictability, it has been profitable every year for the past decade.

Growth

When it comes to growth, the company scored a 6 out of 10.

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On a three-year basis, revenue growth is hardly exciting, but as we move up the income statement, the news gets better. Ebitda outperforms revenues and earnings per share without non-recurring items outperforms Ebitda. All of this means that the company is efficient and effective, doing a great job of leveraging its sales and revenue.

Free cash flow, however, was a disappointment. As the table shows, it has been negative for the past three years. In more detail, it fell in 2018, 2019 and 2020 before partially recovering in 2021. Over the last 10 years, the results are a little better, an average of 4.15% per year, but hardly dazzling.

Dividends and share buybacks

Since the end of last year, many stocks have produced higher dividends because their stock prices have fallen. This also goes for Huntsman:

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Despite this current yield and even higher yields since March 2020, the dividend payout remains low, as the table shows.

Share buybacks are also in positive territory, and adding the three-year buyback ratio to the dividend yield means shareholders enjoy strong returns regardless of capital gains or losses.

Ratings

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At 10 out of 10, Huntsman receives top marks for the review, based on the GF price/value ratio. The GF value line, which is based on historical ratios, past financial performance and analysts’ future earnings projections, shows that intrinsic value is significantly higher than the October 10 closing price of $25.50.

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We also see that the P/E ratio of 4.37 is quite low, especially compared to the chemical industry median of 15.87. When we divide the P/E ratio by the five-year Ebitda growth rate of 6.30%, we get a very low PEG ratio of 0.07, suggesting deep undervaluation.

Summary of Fundamentals

Overall, Huntsman earns a respectably high GF score of 86 out of 100, indicating he has good potential for outperformance going forward based on backtesting data.

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Guru and Insider Holdings

Eleven gurus hold Huntsman shares, led by

chuck royce (Trades, Portfolio) of Royce Asset Management with 2,411,353 shares. These shares represented 1.20% of the company’s outstanding shares and 0.70% of the fund’s assets under management at the end of June.

Jim Simons (Trades, portfolio)’ Renaissance Technologies increased its stake by 72.09% during the second quarter to end with 1,080,700 shares.

Jeremy Grantham (Trades, Portfolio) of GMO LLC added 5.15% to bring its stake to 377,840 shares.

Institutional investors hold a significant stake in the company, holding 88.69% of the outstanding shares at the end of June. Insiders own an additional 6%, led by Peter Huntsman, the chairman and CEO, who held 5,805,620 shares as of last report (February 2022).

Conclusion

Investors looking for industrial stocks might want to include Huntsman on their prospect list. It has a good set of fundamentals and, as noted, is turning its modest earnings growth into attractive earnings growth. Dividend and stock buybacks could make a healthy contribution to shareholders’ bottom line.

With its share price currently plummeting, it looks like the stock has a good margin of safety. But with a recession looming, this could be a good case for the buying average.

Value investors are likely to miss Huntsman because he carries some debt, unless they sense the stock price is heavily discounted. Growth investors may wish to watch for a rebound in the price, but if indeed a recession is around the corner, it may drop further before recovering. Income investors can consider this stock if they are up for the adventure.

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