Buying opportunity in the Plastics stocks.
First of all, a little about myself. I have spent 30 years in the plastics industry. Primarily but not exclusively in the automotive space. I am not a professional investor and as you’ll soon find out, I am not a professional writer. I am hoping to start writing a few articles sharing my insight into some plastics and plastics related stocks as well as some the industry trends. A lot of the sector has been hit pretty hard, so I feel that now is a good time to start looking at buying some of the stocks.
None of the companies I write about will be companies that are currently customers or companies I am currently working with. This first article will primarily focus on the companies that I have close first hand knowledge of. As you’ll see, I’m more than happy to reference other people’s research, so you can expect a link heavy article.
Basically, 2018 was a brutal year for plastics stocks, as a group they were down significantly more than the general market. As you can see from Frank Esposito of Plastics News article from December of 2018, last year was a brutal year for plastics stocks. https://www.plasticsnews.com/article/20181220/BLOG07/181229993/plastics-materials-stocks-saw-little-to-like-in-2018
I can assure that the plastics industry is not going away and now, may very well be a good time to start buying a few of the beat up names.
I’ll first start with a trend in the plastics industry that has been around for some time but has been picking up steam the last few years. That trend is LFT/LFRT, that stands for Long Fiber Technology/Long Fiber Re-Enforced Thermoplastic. For the sake of simplicity, I will refer to it in this article as LFT. LFT has been around for many years, simply put it is producing plastic with intact fiber contained in the core of the plastic pellet. There is some debate as to what constitutes LFT, but as a general rule a pellet that contains a fiber length of greater than 4mm is considered LFT. Although the Wikipedia description is lousy, I will still provide the link, Long-fiber-reinforced thermoplastic - Wikipedia
The advantage of LFT is that in the molding process, the fiber maintains a relative long length and those fibers all crisscross each other and provide and very strong bond. For many years LFT was primarily used to increase structural strength of finished parts and for the most part the fiber that was used was glass. FYI, when plastics people say glass, they are really referring to fiberglass. You may not realize it but a huge number of the plastic products in your home, on your desk and in your car have glass in them. You can’t tell by looking at them but believe me it’s in there. The last 10 years or so, LFT has seen a significant increase in use, primarily because of the auto industry’s desire to reduce wait. This auto weight reduction trend began the search for more ways to take weight out of a vehicle. One of the trends that rapidly took hold was the use of carbon fiber. Up until this trend began, the problem with carbon fiber was it was incredibly expensive, which limited it’s use to everyone but NASA (a bit of a stretch but close to true) The advantage of carbon fiber is it is incredibly strong and much lighter than plastic. So, the increased use of carbon fiber, naturally increased the production of carbon fiber and the last few years we’ve seen a dramatic decrease in the price of carbon fiber. The government has even been involved in trying to move the price of carbon fiber lower through public/private work at Oak Ridge Labs, Carbon Fiber and Composites | ORNL So now, were seeing carbon fiber integrated into LFT and the result is structurally strong parts at roughly 50% of the weight of traditional plastics.(carbon fiber weighs a lot less than plastic and significantly less than metal)
Most plastics manufacturers do not have LFT capabilities, so what we have seen the last few years is a battle for LFT dominance. There are several smaller players, but the primary big players in LFT now are:
SABIC (Saudi Arabia), Celanese Corporation (US), PolyOne (US), Solvay SA (Belgium), PlastiComp Inc. (US), RTP Company (US)
They sell their long fiber products under the following trade names:
Okay, enough of the technical crap let’s get into to how to make money.
I believe there is money to be made in companies that provide LFT materials. In the US there are really only two ways to play it, PolyOne (POL) or Celanese (CE) Both of these are great companies, but from a stock perspective I prefer PolyOne over Celanese at the moment. The reason is twofold, PolyOne has had a deeper sell off and PolyOne has basically gone all in on LFT over the last 12 months. Make no mistake, they were a bit behind Celanese on LFT but in my opinion they have now surpassed them.
Two impressive moves that Polyone has recently made is their acquisition in Polystrand, PolyOne Announces Acquisition of PlastiComp and the global licensing agreement with ElectriPlast. PolyOne Expands Automotive Engineered Polymer Portfolio with ElectriPlast™ Conductive Long Fiber Technology Polystrand is arguably the most advanced LFT manufacturer in the world, this significantly expands PolyOne’s global LFT footprint.
The license with ElectriPlast, I believe will result in a significant payback for PolyOne. To be fair, you should know I’m quite familiar with ElectriPlast. A few years ago, while working at a global plastics company we attempted to acquire the rights to ElectriPlast. At the time, we believed the LFT market that we could capture from Electrical Auto alone was well over 75 million annually and much more opportunity if utilized in other sectors. I personally worked very closely with ElectriPlast for over 12 months and was and am still convinced they are the only player in the LFT conductive plastics space and clearly PolyOne agrees. The problem we had was our company was far larger than PolyOne and getting a deal done was nearly impossible because of internal politics. ElectriPlast eventually left the negotiating table when our final offer was basically asking them to give us the technology (Again a stretch, but not much of one.) I’ve been involved in several acquisitions in my career and the ElectriPlast one, was the one that probably excited me the most. It’s not often you get the opportunity to get exclusive access to a newer technology that essentially has no competition. As it turns out, in my opinion, ElectriPlast is far better off with PolyOne as a partner than probably any other plastics company. PolyOne is small enough to move very nimbly and large enough to invest significant resources to successfully complete commercialization worldwide. After speaking with a few old PolyOne friends this year at the PolyOne investor day at NPE, I believe the ElectriPlast license will add 10's of million of dollars to the PolyOne bottom line by 2020.
Another interesting move that PolyOne recently made, was the hiring of Christopher Pederson as their President of Specialty Engineered Materials. PolyOne Hires Christopher Pederson as President, Specialty Engineered Materials At first glance this may look like just another hire, but upon further examination you’ll notice that Mr. Pederson’s previous position was at Hexcel…hmmm, they make carbon fiber and he also worked at Cytec and Boeing. Clearly PolyOne brought him in to further the LFT business and infiltrate the aerospace business with it. Chris Pederson - President - Specialty Engineered Materials - PolyOne | LinkedIn,
Speaking of Hexcel, HXL, I believe this is another great stock to buy to capitalize on the growing LFT business as well as carbon fiber use overall. The stock has been on a nice run and long term I would anticipate that to continue. Carbon fiber use is only going to increase over the next several years.
Why I like PolyOne now.
- Stock is oversold
- Polystrand Acquisition, this makes PolyOne world leader in LFT manufacturing
- ElectriPlast License, This makes PolyOne world leader in conductive plastic LFT
- Christopher Pederson Hire
- Overall commitment to LFT
- Great management
If you’re interested in a little more excitement then you should take a look at Integral Technologies, OTCPK:ITKG they own ElectriPlast and the PolyOne license is with them. Basically, they’re a penny stock that has been around for over 20 years. Full disclosure, I do own ITKG. PolyOne alone will make this stock soar. PolyOne paid a $1 million license fee for access to the shielding applications of ElectriPlast. This may not sound like a lot of money for a company of PolyOne’s size, but I can assure you it is. In the year since they signed the license, they have probably spent 3x that amount getting product into their system and marketing it. I was particularly encouraged by the recent PolyOne press announcing the formal roll out of their Surround product(it’s the rebranding of ElectriPlast) Move Over, Metal: PolyOne Launches Surround™ EMI/RFI Shielding Formulations
This means they’re about to rock and roll. Our rule of thumb was it usually would take 18-24 to get a new product to market, by the looks of it, PolyOne is on track for that same time table. I wouldn’t expect significant sales of Surround until the 18-month mark, which is mid-2019, but after it starts, I would anticipate sales in the 10’s of millions of dollars. I realize ITKG is just a penny stock but at .05, in my opinion it’s a steal. PolyOne alone will make them profitable and they also have a battery technology as well as their non-shielding business. Each of those could fetch another few million dollars.
Why I like Integral, OTCPK:ITKG now.
- Dirt cheap, I'm no stock expert but I think it could safely be trading now at 10x current price just based off of PolyOne.
- Market views it is a POS penny stock, so time to buy before they realize it isn't
- Global partner now responsible for their success
- First to market
- At least an 18-month head start over competition
- Strong IP portfolio
- Mulit million dollar license revenue potential
- Further opportunity with battery and non-shielding
- Did I mention PolyOne?
A couple other stocks in the plastics sector that are worth taking a look at are Milacron and Loop Industries
Why I like Milacron, MCRN now.
- Plastics ain’t going away
- Plastics companies need equipment
Why I like LOOP
- Thyssenkrupp Global Alliance - Loop Industries and thyssenkrupp Sign Global Alliance Agreement to Transform the Future of Sustainable Pet Plastic Manufacturing
- Tree Hugger approved
- Take over candidate given they are partial solution to anti plastics movement.
In case I've not made it clear, I like plastic and I like plastics stocks. I recognize, there are some environmental concerns but I am confident the industry is working hard to resolve these issues. At the moment, plastics stocks in my view are oversold and have a great opportunity to appreciate better than than the overall market. I also believe that LFT will continue to be a growing contributor to the plastics market and those companies dedicating resources to LFT will benefit greatly.
Disclosure: I am/we are long ITKG, POL, HXL, LOOP.