Basic Materials and Chemicals Sector Ideas

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Sensient, Quaker Chemical, HB Fuller -- >>> Three Specialty Chemicals Stocks to Consider



By Damon Churchwell

February 28, 2013

Tickers: FUL, HUN, KWR, RPM, SXT



http://beta.fool.com/dchurchwell/2013/02/28/three-specialty-chemicals-stocks-consider/25711/



Companies that focus on a particular sector or two as suppliers of chemical manufacturing additives seem to be attractive investments at this time. Examine each stock on an individual basis, according to the end markets and market share. I would like to highlight three such stocks that hold appeal now for near- or long-term price improvements.

Quaker Chemical Corp. (NYSE: KWR)

I have always been interested in this producer of chemicals for the automotive, aerospace and other heavy industries. A volatile stock with low trading volume, as indicated by its inflated beta (2.59), KWR is a selection for total-return investors. Its price upturn has brought the dividend yield to only about 1.7%. Still, it offers a good combination of growth and yield.

About 93% of revenues are delivered by the Metalworking Process Chemicals segment. Sales have historically climbed during periods of expansion in the automotive industry. Of late, product volumes have been on the rise across most regions, with the exception of Europe. Plus, price increases are providing a lift to gross profitability. In all, earnings probably jumped about $0.18, to $3.41 for the full year 2012.

Looking to this year, ongoing positive momentum ought to spur further profit gains. Stronger euro and Brazilian real currencies would assist the bottom line, as most of the impact of volume gains are being offset by weak currencies. In addition to auto, higher demand in sectors like aerospace and mining, aluminum, tube and pipe, and cans could be catalysts.

Sensient Technologies (NYSE: SXT)

This company’s December-quarter share-net result missed expectations by $0.05, inciting a modest selloff. The $0.55 tally was $0.02 lower year over year. Earnings fell despite a revenue increase of about 5%. Therefore, I think the company can bounce back with a margin improvement. And, the shares might now have enhanced upside potential following the price decline.

Sensient is a provider of fragrances and ingredients to the food industry. Excess costs in its Flavors & Fragrances unit was the cause of margin deterioration last year. Management has initiated a restructuring plan for 2013 to reduce expenses, the primary aspect being a relocation of its Flavors & Fragrances Group headquarters to Chicago from Indianapolis. The goal is $10 million in operating expense pruning annually. About 200 employees will be cut as Sensient consolidates facilities. The result ought to be a resumption of bottom-line gains this year.

H.B. Fuller (NYSE: FUL)

H.B. Fuller produces adhesives and construction related products. An acquisition, Forbo Holding’s adhesives business, was a source of growth in the second half of 2012 and should continue to bolster earnings through 2013, as the integration is completed. Fuller closed on that purchase in March, 2012.

For this fiscal year (ends in November), management is guiding toward revenue growth of around 10%, and operating income expansion of 20%. The core adhesives units look to be in good shape. Also, the North American construction unit, though only a modest portion of revenues, should contribute to earnings increases. Fuller’s construction unit mostly serves the residential market.

This company, too, is taking actions to consolidate and close facilities. It foresees pressure on the operating margin in the second half of this year, due to raw material cost hikes, and is aiming to offset the impact.

Of the three companies illustrated here, Fuller has the greatest near-term profit growth outlook. Along with acquisition benefits, it might well see gains from international markets, including Europe and China, where it is building a presence. Finally, Fuller is also gearing up for the long term.

FUL stock holds appeal based on the company’s growth strategy. They are worth considering at their current price.

Conclusion

Specialty Chemicals remains an industry to select from in my view. Take a look at my previous blogs, where I wrote about Hunstman Corp. and RPM International.

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