Last February, the price of Huntsman Corp. (HUN, Financial) was just over $40; roughly eight months later, the price is $25.50 (Oct. 10 closing). Like many other companies, its price has been eroded by the forces of the broader market retreat.
Its price came down despite good quarterly results, making it a potential candidate for investors who like to bottom fish. The slippage also means investors now get a dividend of better than 3%, while at the same time the company is aggressively buys back its own shares.
About Huntsman
The company calls itself “a global manufacturer of differentiated organic chemical products. Our products comprise a broad range of chemicals and formulations, which we market globally to a diversified group of consumer and industrial customers.”
In its 10-K for 2021, it went on to report that its products are used in many applications, including those in “adhesives, aerospace, automotive, construction products, durable and non-durable consumer products, electronics, insulation, medical, packaging, coatings and construction, power generation, refining, synthetic fiber, textile chemicals and dyes industries.”
This slide, from its presentation to the Jefferies Industrials Conference on Aug. 10, shows how its products are grouped:
Note the dimming of the Textiles Effects column, because it is being sold. That is one of the changes going on within Huntsman as it strives to create what it calls “a simplified, higher value-added portfolio.” The company goes on to explain the transition focuses on growing its Ebitda margin and free cash flow conversion.
Competitors
Competing companies vary by product groups. For instance, BASF (BASF), Covestro (COVTY, Financial), Dow (DOW), Lubrizol (delisted) and Wanhua Chemical Group also produce polyurethane chemicals. In its downstream markets, Huntsman faces competition from Carlisle (CSL, Financial), Coim (CMMRF, Financial) and Kingspan (KGSPY, Financial).
According to Huntsman's annual filing, the polyurethane chemicals business has two competitive aspects:
- If price is the dominant factor, it differentiates itself with a high level of customer support.
- When price is not dominant, it competes on product performance, its ability to respond quickly to customer needs and providing innovative solutions.
Its competitive strategy seems to work; it has a solid net margin that is roughly double the chemical industry median.
Over the past five years, its performance has been close to that of its industry peers and a bit below the S&P 500:
Financial strength
The company scored a 7 out of 10 rating for financial strength.
Is debt a problem for Huntsman? Likely not, even though the Altman Z-Score is 3.09, which is barely into the Safe zone (0 to 1.7 is in the Distress zone, while 1.8 to 3 is the Grey zone).
The company has a reasonable interest coverage ratio, indicating it has enough operating income to pay its interest expenses 18 times over. Do not overlook the Piotroski F-Score either, which is a full 9 out of 9, indicating stellar management of the company’s finances.
Per company policy, it has a target for indebtedness, as shown in this slide from its investor presentation:
The company’s financial strength is backed up by its ability to keep creating value. The weighted average cost of capital is 7.65%, compared with its return on invested capital of 13.93%.
Profitability
Huntsman's profitability also fared well with an 8 out of 10 rating.
Huntsman’s net margin stacks up well compared to its peers and competitors in the chemical industry. While the industry average is 6.81, the company’s net margin is 13.45%.
It also enjoys a leadership position in the industry when return on equity is considered. A return on equity of 30.85% is very good, but there is a significant difference between its ROE and its return on invested capital (the former is just equity contributed by shareholders, while the latter includes both shareholder contributions and borrowed capital).
And although the company has just a one out of five-star rating for predictability, it has been profitable in every year of the past decade.
Growth
In regard to growth, the company scored a 6 out of 10 rating.
On a three-year basis, revenue growth is hardly exciting, but when we work our way down the income statement, the news gets better. Ebitda outperforms revenue and earnings per share without non-recurring items outperforms Ebitda. All of which means the company is efficient and effective, doing an excellent job of leveraging its sales and revenue.
Free cash flow, though, has been a disappointment. As the table indicates, it was negative over the past three years. On a more detailed basis, it declined in 2018, 2019 and 2020 before making a partial recovery in 2021. Over the past 10 years, the results are somewhat better, an average of 4.15% per year, but hardly stellar.
Dividends and share repurchases
Since late last year, many stocks have produced higher dividends yield because their share prices tanked. That also holds for Huntsman:
Despite this current yield and even higher yields since March 2020, the dividend payout remains low, as the table indicates.
Share buybacks also sit in positive territory, and adding the three-year buyback ratio to the dividend yield means shareholders are enjoying strong returns regardless of capital gains or losses.
Valuations
At 10 out of 10, Huntsman receives top marks for valuation, which based on the price-to-GF Value ratio. The GF Value Line, which is based on historical ratios, past financial performance and analysts' future earnings projections, shows the intrinsic value is significantly higher than the Oct. 10 closing price of $25.50.
We also see the price-earnings ratio of 4.37 is quite low, especially when compared with the chemicals industry median of 15.87. When we divide the price-earnings ratio by the five-year Ebitda growth rate of 6.30%, we get a very low PEG ratio of 0.07, suggesting deep undervaluation.
Fundamentals summary
Overall, Huntsman earns a respectably high GF Score of 86 out of 100, indicating it has good outperformance potential going forward based on backtesting data.
Guru and insider holdings
Eleven gurus hold Huntsman stock, led by Chuck Royce (Trades, Portfolio) of Royce Asset Management with 2,411,353 shares. Those shares represented 1.20% of the company’s shares outstanding and 0.70% of the fund’s assets under management at the end of June.
Jim Simons (Trades, Portfolio)' Renaissance Technologies upped its holding by 72.09% during the second quarter to finish with 1,080,700 shares. Jeremy Grantham (Trades, Portfolio) of GMO LLC added 5.15% to boost his holding to 377,840 shares.
Institutional investors have a large stake in the company, holding 88.69% of shares outstanding at the end of June. Insiders own another 6%, led by Peter Huntsman, the chairman, president and CEO, who owned 5,805,620 shares as of the latest report (February 2022).
Conclusion
Investors looking for industrial stocks might want to include Huntsman on their list of prospects. It has a good set of fundamentals and, as noted, is turning its modest revenue growth into attractive earnings growth. The dividend and share buybacks could contribute healthily to shareholders’ bottom lines.
With its share price currently in a slump, it appears the stock has a healthy margin of safety. But with a recession possibly looming, this might be a good case for dollar-cost averaging.
Value investors likely will pass Huntsman by since it carries some debt, unless they feel the stock price is deeply discounted. Growth investors may wish to watch for a rebound in the price, but if, indeed, a recession is around the corner, it may fall further before it picks up again. Income investors may consider this stock if they are willing to live adventurously.
