2 Stocks Benefiting From Falling Natural Gas Prices

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 |  Includes: ASH, DOW
by: Bret Jensen

United States chemical companies are enjoying better cost dynamics over their foreign competitors driven by a low-cost natural-gas/energy advantage and favorable supply dynamics. U.S. based specialty chemical companies should also benefit from lower cost structures and in most cases above gross-domestic-product growth compared with Europe and Japan.

Here are two chemical companies I like at these price levels.

Ashland Inc. (NYSE:ASH)

Business description from Yahoo Finance (see here):

Ashland Inc. operates as a specialty chemicals company in the United States and internationally. It operates through four segments: Specialty Ingredients, Water Technologies, Performance Materials, and Consumer Markets.

4 reasons Ashland is worth more than $59 a share:

  1. The company has consistently beat consensus earnings estimates over the past year. It has beat estimates for the last four quarters by an average of over 12%.
  2. The company is showing rapid EPS growth. It earned $3.58 per share in FY2011, is projected to make $5.45 in FY2012 and analysts expect $6.76 in earnings in FY2013.
  3. The stock is cheap at just 10% over book value and five year projected PEG of under 1.
  4. Credit Suisse has an “outperform” rating on Ashland. It also just raised its earnings estimates and price target on the company. It now has a price target of $71 a share on ASH.

Dow Chemical (NYSE:DOW)

Business description from Yahoo Finance (see here):

The Dow Chemical Company manufactures and supplies products used as raw materials in the production of customer products and services worldwide. The company offers materials for chemical mechanical planarization pads and slurries, chemical processing aids and intermediates, electronic displays, food and pharmaceutical processing and ingredients, home and personal care ingredients, hygiene and infection control, photolithography materials, printed circuit board materials, process and materials preservation, and semiconductor packaging.

4 reasons Dow Chemical is worth more than $30 a share:

  1. Natural gas accounts for 20% of Dow’s operating costs. The continued low price for NG is helping Dow’s earnings significantly. It made $1.97 per share in FY2010, is expected to make $2.62 in FY2011 and analysts project $2.79 in earnings in FY2012.
  2. The stock pays a 3.3% dividend. Given its robust operating cash flow and low payout ratio (Less than 40% of FY2011’s earnings), that dividend should go higher in the future.
  3. Credit Suisse has an “outperform” rating on DOW and it is its #1 in the large cap chemical space. It also has a $40 price target on Dow Chemical.
  4. The Rohm & Haas merger gave Dow a better revenue mix of more less volatile specialty chemicals. Its balance sheet should continue to improve as it uses its cash flow to pay off the debt acquired in the merger.

Disclosure: I am long DOW.