Air Products and Chemicals Inc (APD)

[hptaxis]

Best Chemicals Stocks in Uncertain Times
Credit Suisse likes Air Products & Chemicals, Cytec and FMC.
http://online.barrons.com/article/SB50001424052702304133804576561051067921600.html?mod=BOL_hpp_oe

The recent moves in chemicals stocks tied to concerns about the macro have resulted in a number of opportunities for investors depending on their risk appetite. In general, we think it's too late to simply "sell beta and cyclicals" given the huge stock corrections we have seen in the space.

That said, while some names may have as much as a double ahead when the economic data turns up, it doesn't mean you can't be fired for being invested in them if we see a deep recession in the near term. As a result, we have attempted to frame the downside risk for the stocks in both a deep recession and a modest recession as well as the potential upside reward if the group enjoys modest growth in 2012.

We aren't sure what is going on in the macro. The macro environment appears to be in complete disarray owing to a host of financial/political drivers. This has led to various potential outcomes in 2012 ranging from a second credit crunch (and deep recession) to a moderate recession to simply more moderate growth compared to the past two-plus years (while the consensus and our published estimates may point to the "growth scenario," the buy-side expectations are clearly lower).

Following conversations with each of our companies as well as Credit Suisse's economists, we don't believe a deep recession/credit crunch is coming but to help frame the downside, we have included that as a possibility.

In our report we have worked to determine the potential earnings per share in 2012 in the aforementioned scenarios. In a 2008/2009 environment (unlikely but not impossible) the group should see earnings down about 29.5% in 2012 versus 2011 -- not as bad as what was reported in 2009 owing to cost cuts and balance-sheet changes but still solidly down. In a modest recession we believe the group would see earnings down roughly 8%. Finally, in a growth environment we could see earnings growth in 2012 of roughly 18%.

Largely, we believe the multiples seen in 2008/2009 are the most conservative/reasonable in determining a "worst case" scenario (with some adjustments for those debt-laden names thrown into the abyss that have since restructured their balance sheets). Meanwhile, historical multiple averages should be reasonable in determining upside in a modest recession or modest growth scenario.

With the above in mind looking at the overall risk/reward profiles, 10 of our 20 names under coverage have at least two times the potential upside (in the growth scenario) as they do downside (in the deep-recession scenario). In that group, only two have limited downside in a deep recession (less than 10%) and may have upper-teens-plus upside in the "modest recession" scenario -- Air Products & Chemicals (ticker: APD), Cytec Industries (CYT), although FMC (FMC) is not far off from these hurdles.

Names for investors with a greater ability to stomach risk would include: Dow Chemical (DOW), Ferro (FOE), Ashland (ASH) and Rockwood Holdings (ROC) -- offering 50%-plus upside in a growth environment and upside in a modest recession, but having solid downside in a deep recession.

In addition, for RPM International (RPM) we think the year-to-date stock weakness, the relative resilience of their earnings, and a high-dividend yield offer a decent risk/reward profile, so we are upgrading our rating to Neutral [from Underperform].

For Nalco Holding (NLC), with no upside in a growth environment (given the Ecolab (ECL) bid) and solid downside in the off chance the Ecolab merger falls through, we are downgrading our rating to Underperform [from Neutral].