On June 18, The Wall Street Transcript interviewed Dmitry Silversteyn, a Senior Analyst with Longbow Research, covering the chemicals industry. Key excerpts, with his sector picks and pans, follow:
TWST: Who is at the top of your list?
Mr. Silversteyn: On the larger side, I still like Rohm and Haas (ROH). I have talked several times during this discussion about the acrylic chain being very strong, and Rohm and Haas is a leading player in acrylics. They also have a very good position in electronic chemicals, and their exposure to the electronic sectors gives them a faster-growing business.
I like Albemarle (NYSE:ALB) because they still have pricing power in their fine chemicals business, as well as the catalysts. They also have pricing power in polymer additives, particularly the brominated flame retardant portion.
I like Ecolab (NYSE:ECL) - it's hard not to like the company. You have to be selective when you buy the stock because it never looks cheap, but to the extent you can buy it on a dip, even if it's a small dip, you will enjoy nice long-term gains with the stock.
TWST: Are there any other names that you like at this juncture?
Mr. Silversteyn: If you look at the smaller cap names, there are two stocks I like. One is Cambrex (NYSE:CBM), which has undergone a fundamental change in company profile. They sold about half the company, paid out a special dividend to investors with the proceeds and are now concentrating on running their legacy active pharmaceutical ingredients business. They have a very good balance sheet position right now. Their end markets seem to be at least stabilizing after a significant amount of pricing pressure from Indian and Chinese competition. The company itself is still somewhat misunderstood by the Street, and therefore, the stock is a little mis-priced. There are plenty of opportunities there, and this is a company without exposure to the economic environment and without much exposure to petrochemical raw material costs.
TWST: What's the misperception on the part of the market?
Mr. Silversteyn: People are looking at the history of the fine chemicals industry, all the wrecks that M&A activity created in the late 1990s and early 2000s, and the lack of profitability for a lot of players in this industry because they bought into this market at a very high price and are now paying the consequences. They tend to paint Cambrex with the same brush, whereas this company did their deals back in the early 1990s, rather than the late 1990s, so they don't have the high-cost legacy issues. Their plants are fairly well run and they are spending a lot of time, effort and money on growing their specialty and niche applications, which allows them to command higher pricing and get away from the generic API market. That has been the market with the most price competition. So it's an evolving company, but the place that they are evolving from is probably not as bad as people generally seem to think.
Another company I like in the semiconductor space is Cabot Microelectronics (NASDAQ:CCMP), which is a leader in chemical mechanical planarization slurry. That business is levered to the semiconductor industry, given that the semiconductors after two soft quarters seem to be on their way to recovery. This is a good time to invest in Cabot Micro. There are internal developments that have allowed the company to grow fast in their markets, and with the price that you are paying, especially given the fact that this company has about $7 of cash on hand, you can argue that you are paying a value type multiple for a growth type company.
TWST: Are there any names to be worried about in this space that are either losing market share or are overvalued?
Mr. Silversteyn: On the overvalued front, I would look at OM Group (NYSE:OMG). This is a cobalt refiner and processor. Obviously, cobalt is near all-time highs. The last time it was at these prices was maybe 20 years ago or so, but even with the historically high cobalt price, the stock - which has been used by many players as a proxy for cobalt because you can't really invest in cobalt on its own; it is not an exchange-traded metal - I think that the prices got really stretched above $60, and I would feel more comfortable if the stock was in the low $50s. So it's at least $10 overvalued here.
Another company that I have some concerns about is Pall Corporation (NYSE:PLL). This has been a historic underperformer that has delivered a couple of good quarters in a row. Investor exuberance has pushed the stock up to $43, which is an unsustainable level as well. This company is notorious for stubbing its toes regularly. It hasn't done so in the last couple of quarters, so it's probably due. Given the stretched valuation and very high investor expectations for the stock, any disappointment will be viewed very negatively.