The global chemical industry is a nearly $3 trillion industry, concentrated in three major areas of the world: Western Europe, North America and Japan. The US chemical industry represents roughly 15 percent of the total chemical industry output. The chemical industry in the US supports roughly 25 percent of the nation's GDP, with 170 major chemical companies operating internationally, and the industry, as a whole, is roughly valued at $760 billion.
Huntsman Corporation (HUN) is one of the global leaders in the industrial and consumer chemicals industry with annual revenues in excess of $11 billion. The company has generally been improving its performance, especially over the past three years. The company has been successful in achieving sustainable long-term growth in revenues, improved margins and superior returns to its shareholders.
The company has steadily increased its margins after a dip in margins in 2010, primarily due to an increase in foreign currency transaction losses, higher operating costs and loss on early extinguishing of debt. The ROE has also followed a pattern similar to that of the net margin, increasing over the three years from 2010 to 2012.
The debt-to-equity ratio of the company has seen substantial reduction in its leverage; however, the company is still operating at a significantly higher leverage than the industry. Operating at a leverage greater than the industry might not be as problematic for HUN, because of a lower interest rate environment and its well-diversified business, the company can currently afford to operate at a high rate of debt, but this may not be afforded in the long term.
The largest revenue category for the company is its polyurethane segment, which comprises almost 43 percent of the company's total revenues. The polyurethane segment has historically grown at a CAGR of 4.8 percent over the last five years, making it the second-fastest growing segment of the company.
According to the Q1 2013 management's estimates, approximately 30 percent of the segment's production was used by end consumers, with 70 percent by industrial consumers. The primary use for the segment's products has been for insulation, adhesives, coating & elastomers and automotive & marine applications.
The pigments segment has been the fastest-growing segment for the company, growing at a CAGR of more than 7.5 percent over the past five years. The segment comprises more than 12.5 percent of the company's total revenues. Based on 2012 annual results, in the pigments segment approximately 41 percent of total revenues were generated through consumption by individual consumers, while 59 percent were from industrial consumers. The largest, most significant use for the segment's products has been for the purpose of paints & coatings, which was approximately equal to 39 percent of the total segment.
The pigments segment has not only been the fastest-growing, but has been the most profitable segment for the company as well. As depicted in the graph above, the two most profitable segments for the company are also the two fastest-growing segments of the company. The reason for higher profitability has been stabilizing prices in the pigments market and improving margins for the company's MDI urethanes.
The textile segment has been the worst-performing for the company over the analyzed period. The CAGR in revenues achieved by the segment has been -4.47 percent, and the segment has been persistently posting negative EBITDA margins.
The company has also been investing prudently over the years. It has invested heavily in its most profitable and high-growth segments. The company has gradually scaled back its capital expenditures in the textile segment which has, as shown above, experienced persistent losses over the analyzed periods. These investment patterns, if continued in the future, would enhance the returns to the company's shareholders.
The regional analysis indicates that the company is not heavily dependent on any particular region, but it has a significant presence in all the major markets in the industry. This enhances the company's return-generating capability as it is less vulnerable to adverse market conditions in any particular region. This makes the company less risky for investors.
The company's ROE has increased significantly over the years, from 7.15 percent in 2009 to 20.59 percent in 2012. As the financial leverage is stable, there is a large contribution of increasing ROA to this increasing trend in ROE. The increase in ROA is contributed by both greater asset utilization and greater net margin. The asset turnover increased from 0.92 to 1.28 over the stated period, while the net margin increased from 1.63 percent to 3.38 percent from 2009 to 2012.
Based on valuation multiples, HUN is generally undervalued as compared to its peers and the industry average. As can be seen from the table above, the multiples are below the average industry figures. The company is undervalued when compared to its competitors, with the exception of OTCQX:BASFY, which is currently trading at substantially lower P/E and P/B ratios.
From its performance metrics, the company is again generally superior to its peers and the industry average. The company has achieved superior revenue growth and returns on equity as compared to the industry. Similar to the trends in valuation, the company has generally been achieving better results than its peers, except for BASFY. HUN has achieved revenue growth and net margins inferior to BASFY, but HUN has a better ROE.
Poor economic conditions in Europe, uncertainty regarding the US economy and a slowdown of economic activity in China has suppressed the performance of the chemical industry. Although the industry is not expected to reach its prime for some time, it is expected to do better relative to last year, aided by the improving US economy and hopes of a rebound in Chinese demand. Other than these factors, the industry will also get a push from rising demand in the emerging markets and the recovery of the US housing market. Thus, it is expected that 2013 would be much better than the last two years.
Based on the analysis, the company has gradually improved its performance by generating a higher return on equity, primarily by increasing its asset utilization and improving net margins. The diversified nature of the company's operation makes the company aptly prepared for any adverse situation created in any particular market. The growing revenues and diversified client base as well as improving demand for the industry would certainly help the company in producing better results in the future. Thus, I would give a buy recommendation for the company.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by Core Equity Research, Analyst. Core Equity Research is not receiving compensation for it (other than from Seeking Alpha). Core Equity Research has no business relationship with any company whose stock is mentioned in this article.