In Matt Nesto’s Stock Blog piece, “Dow-Rohm Deal: Coat-Tail Winners,” which firm is “even…considered a spec chem”?
…even International Flavors & Fragrances (IFF) is considered a spec chem.
CNBC Stock Blog: Neil Hennessy is a frequent CNBC guest and master stock picker. What was his Web Extra pick for Tuesday?
He offered a bonus pick for CNBC.com, Airgas (ARG).
The firm makes industrial gases for both the health care and industrial sectors, including “dry ice” for the transportation of food. Its price-to-sales ratio is less than 1.5.
In the models I follow, Airgas gets high marks for both earnings momentum and price momentum.
My latest column is up at RealMoney as part of my series on wallflowers – stocks that have little or no analyst coverage.
In this column I look at Innospec (IOSP), which makes fuel additives and other specialty chemicals that are sold primarily to oil refineries and other chemical and industrial companies. The company operates in three segments: fuel specialties, active chemicals and octane additives.
Innospec has a monopoly position in the rapidly declining business of tetraethyl lead additives for gasoline. In the past, declines in that business have overshadowed growth in the remainder of the firm. Now accounting for just 16% of total revenue, I think the lead weight is becoming less burdensome.
Innospec scores well in my models:
Disclosure: At time of publication, William Trent has no position in the companies mentioned in this article.
A couple of weeks ago, I wrote on Celanese (CE) for RealMoney, saying it could rise 40% simply by earning the average P/E in its industry.
Today Celanese increased its full year outlook for adjusted earnings per share to between $3.60 and $3.85 from its previous guidance range of between $3.40 and $3.70.
As I noted when I first wrote up Celanese a couple of weeks ago, consensus had already risen to $3.74. Although the stock is up 7% since that recommendation, an industry-average P/E multiple on that number would equal a $60 price for the stock, 33% above the current level.
Since I was away at the time the original article was published and thus failed to link to it, I am reprinting it below.
I’ve been taking a look at chemical maker Celanese, and I have to say I like what I see. I think the shares could rise 44% over the next year simply by expanding its P/E ratio to the average for its industry.
Originally based in
Celanese is an industry leader in acetyl products and high performance polymers used in a wide variety of industries. The company competes primarily with BASF, Dupont (DD - Annual Report), Eastman Chemical (EMN), Dow Chemical (DOW), Rohm & Haas (ROH), and Air Products (APD). Celanese claims to be the low-cost producer in the industry, an assertion backed by its industry-leading profit margin and return on equity.
Sales rose 12% in 2007 due to favorable currency effects and rising prices. The latter trend has, if anything, accelerated so far in 2008.
Year/Year Percentage Change in PPI for Chemicals
Source: Bureau of Labor Statistics
Celanese has also shown itself to be shrewd when it comes to financial matters. Last year it took advantage of the then-favorable credit market to refinance $2.5 billion of debt, reducing its effective interest rates from approximately 10% to 175 basis points over LIBOR. It also borrowed to repurchase 1.5% of its shares, paying what now appears to be a bargain price of $30.50 per share in a Dutch auction.
The company recently authorized, and began to implement, a $400 million share repurchase. Based on their track record, the repurchase may indicate shares remain a bargain.
As an early cycle recovery play, there is of course some risk that a call on Celanese is… well… early. But I see no point in waiting around for a company that has beaten earnings estimates handily quarter after quarter. In the December 2007 quarter, the $0.93 per share earned compared to estimates of just $0.81. Since then, estimates for 2008 have risen from $3.66 to $3.74, and estimates for 2009 have expanded from $3.61 to $3.91.
The ongoing earnings surprises, surprisingly, have not resulted in an excessive valuation. At 11 times current year earnings, the price compares favorably to the industry average of 15.7 times, as reported by Hemscott. Its free cash flow yield of 4.3% is not eye-popping, but compares favorably to the current yield on five-year Treasuries.
I also think the earnings at Celanese are of higher quality than those of its peers. In fact, its 0% accrual ratio indicates that there is essentially no distortion being caused by accounting accruals, compared to reporting earnings on a cash basis.
If Celanese were to trade at the average P/E multiple for its industry, its shares could rise to $60 over the next year. That would mark a gain of nearly 44% from current levels.
I think there is limited downside due to its already low valuation. There is also potential technical support at the 50-day and 200-day moving averages, both within 10% of the current share price.
Disclosure: At time of publication, William Trent has no position in the companies mentioned in this article.
My latest column is up at RealMoney. Here is a summary:
Government economic reports can do more than just indicate the state of the economy. Since many of the reports include industry-level data, digging deeper in the reports can help investors find specific industries to consider more closely. For example, the Bureau of Labor Statistics, which prepares the PPI report, provides detailed information on an industry basis.
Since I wrote about the PPI data in September, the pricing power has shifted to some different industries. Therefore, I thought an update would be in order.
Some of the industries that look interesting are petroleum refineries, industrial gases, computers, computer storage devices, and line-haul railroads.
Disclosure: At time of publication, William Trent has no financial position in the companies mentioned.
According to Paint & Coatings Industry, the top three paint manufacturers are Akzo Nobel (AKZOY), PPG Industries (PPG) and Sherwin-Williams (SHW). These stocks have all done well over the last year despite the slowing demand in two of the largest end-markets for paint: housing and autos.
Pricing power for paint, as indicated by the change in PPI for the industry, is weakening. Estimates have been rising for PPG, which reports later this week. It will be worth listening to the conference call to see if they mention the pricing environment and its potential impact on earnings.
Producer prices rose 0.7 percent in April – Yahoo! News
Elevated energy costs pushed producer prices up a slightly more-than-expected 0.7 percent in April, but excluding volatile food and energy costs, prices paid at the factory gate were unchanged, a Labor Department report released on Friday showed.
As the headline (and core) numbers get widely reported, I like to dig a little deeper into the PPI report to find industries that appear to have more (or less) pricing power than normal. If the pricing power has not yet been recognized widely it can occasionally lead to some good stock picks. (All pricing power charts are from the Bureau of Labor Statistics.)
The pricing power in fruit and vegetable canning appears to be helping Del Monte gain some momentum.
Refinery margins hurt Large Cap Watch List (Track at Marketocracy) member Frontier’s (FTO) earnings. Is a turnaround in sight?
One place the pricing power theory definitely didn’t work is in industrial gas. The stocks never weakened, and now pricing power seems to be making a comeback.
Consolidation and pricing power? What’s not to like about Mid Cap Watch List (Track at Marketocracy) and Large Cap Watch List (Track at Marketocracy) member Steel Dynamics’ (STLD - Annual Report) prospects?
Pricing power for industrial valves helped me call the recent earnings pop for Curtiss Wright (CW - Annual Report).
Would you looky what’s happening to semiconductor pricing? Who would have expected that?
Well, that seems like enough for now. Back again next month.
Disclosure: William Trent has a long position in SMH.
Producer prices up 1 percent in March – Yahoo! News
Overall producer prices rose 3.2 percent from March a year ago, the biggest climb since a 3.8 percent 12 month gain to August 2006.However, core producer prices rose 1.7 percent from the same period 12 months ago, down from a 1.8 percent year-over-year rise in February.
That’s all well and good, but also well reported. However, we like to dig a little deeper and see which industries are benefitting from pricing power, as it could help us identify interesting stock ideas. The PPI charts are from the Bureau of Labor Statistics and presented as the year/year percentage change in price.
Highlight: Anyone know a good pure play in the turbine business?
Fruit and vegetable canners have pricing power:
And it still isn’t showing up in Del Monte’s (DLM - Annual Report) stock price:
Corrugated box prices are getting weaker:
Which may be a signal that demand for them – say, from FedEx (FDX - Annual Report) – is weak:
Given what’s happening to chemical pricing:
We think Dow (DOW) should be more receptive to buyout talks.
All the buyers for industrial valves:
Should be good for Curtiss Wright (CW - Annual Report).
Scarily for DELL (DELL) and Hewlett Packard (HPQ - Annual Report), computer pricing may only get worse.
Finally, semiconductor prices have taken a turn for the worse.
That should be enough to chew on over the weekend.
Disclosure: William Trent has a long position in SMH.
With the end of the first quarter approaching, it is time to adjust the names in our Watch Lists. We will price all the new lists as of the close on Friday, March 30. Today we present our planned updates to the Small Cap Watch List (Track at Marketocracy).
Frankly, we were surprised at the amount of turnover in our screens. Only 9 of the original 29 names made the cut for the new list (which comes in at only 24 names.) Still, given the level of outperformance we saw in the first quarter (actually just two months) and the fact that much of those gains were achieved early, perhaps the turnover is warranted.
So without further ado, the names on the chopping block from the previous list are:
Silgan Holdings (SLGN - Annual Report); Steel Dynamics (STLD - Annual Report); NVR (NVR - Annual report); Middleby (MIDD); Vector Group (VCG); Sanderson Farms (SAFM); Downey Financial (DSL); Waddell & Reed (WDR); Wilshire Bancorp (WIBC); Harrington West (HWFG); Gamco Investors (GBL); Apria Healthcare (AHG); Papa John’s (PZZA); Cato Corporation (CTR); Meredith Corporation (MDP); CSG Systems (CSGS); Energy East (EAS); Dynamics Research (DRCO); Ingram Micro (IM); and Dade Behring (DADE).
The new watch list will be:
Investors didn’t like the PPI headline this morning, as inflation can be bad for the stock market. However, inflation can be good for companies that have the pricing power, so we try to look through the industry breakdown in PPI for clues as to who those companies may be.
For example, fruit and vegetable canning continues to exhibit strong pricing power:
Yet the market downturn has led Del Monte to give back most of its recent gains.
Meanwhile, corrugated box pricing has rolled over. 
When combined with a slowdown at the consumer level, we think this could be bad news for the transportation companies that will have fewer boxes to move around.
Just when we were ready to give up the ghost, the weaker industrial gas prices appears to have broken through to Air Products:
Industrial valve prices are telling us to be patient with Curtiss Wright:
Finally, we have to point out the semiconductors. A price increase is unheard of in this industry, yet supposedly there was one. This is definitely the first we’ve heard about it, but it is worth pointing out just in case.
It would certainly make the market appear less bullish than we had thought.
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