Timing + Value = Opportunity with HUN

December 5, 2018

Timing + Value = Opportunity with HUN

Once the stock market bottomed at the end of October, the major market indices all rallied. Some of that rally lost steam yesterday and pushed all three major indices into negative territory for the last 30 days; but one of the sectors that really seems to have benefitted is the Materials sector. At the beginning of the week, the Trump administration announced it had come to an agreement with China to pause the imposition of any new tariffs on either side of the ocean to open the door, hopefully to more constructive discussions that lead to a useful compromise.

Investors got nervous yesterday, since a number of details about the agreement remain unclear, and after all, there is nothing the market abhors more than uncertainty. Even so, any progress on the trade front should be a net positive for the economy, and for the sectors, like Materials that contribute in one way or another to practically every part of the economy. Materials in particular have been one of the best performing sectors in the market over the last month; as measured by the Materials Select Sector SPDR (XLB), the sector is up a little more than 5% since it found a short-term bottom at the end of the third week of October.



One of the most interesting stocks in the Materials sector right now is Huntsman Corp. (HUN), a mid-cap Chemicals company that is down more than 41% year-to-date, and nearly 50% since hitting a high around $36 in January. This is a company that produces chemicals that are used to create products in practically every industry think of, from consumer good (think products like detergent and textiles for apparel and home furnishings) to resins for automotive, marine, and construction applications, and polymer products for coatings, adhesives, and electronics. Their fundamentals are almost uniformly impressive, and the stock’s decline for the year has put it into territory that translates to a terrific bargain. If you factor the short-term emotional boost that you would naturally expect to see in the market from trade progress, that makes HUN a stock that looks like a terrific combination of value and timing right now.

Fundamental and Value Profile

Huntsman Corporation is a manufacturer of differentiated organic chemical products and of inorganic chemical products. The Company operates all of its businesses through its subsidiary, Huntsman International LLC (Huntsman International). The Company operates through five segments: Polyurethanes, Performance Products, Advanced Materials, Textile Effects, and Pigments and Additives. Its Polyurethanes, Performance Products, Advanced Materials and Textile Effects segments produce differentiated organic chemical products and its Pigments and Additives segment produces inorganic chemical products. The Company’s products are used in a range of applications, including those in the adhesives, aerospace, automotive, construction products, personal care and hygiene, durable and non-durable consumer products, digital inks, electronics, medical, packaging, paints and coatings, power generation, refining, synthetic fiber, textile chemicals and dye industries. HUN’s current market cap is $4.7 billion.

  • Earnings and Sales Growth: Over the last twelve months, earnings and sales have been impressive, with earnings increasing more than 25%, and sales growing about 12.5%. Earnings did decline over the last quarter by almost 17%, while revenues were mostly flat and increased only about 1.5%. The company’s margin profile over the last year is a sign of strength, since Net Income was almost 10% of Revenues over the past year. A potential red flag does come from the last quarter, when Net Income actually turned negative by about .04%.
  • Free Cash Flow: HUN’s free cash flow is very healthy at $1.1 billion. That translates to a Free Cash Flow Yield of 22.5%.
  • Debt to Equity: HUN has a debt/equity ratio of .57. This is a conservative number, and the company’s balance sheet indicates operating profits are more than adequate to service their debt, with healthy liquidity to provide additional flexibility. Total cash in the last quarter was $446 million, while long-term debt is $2.2 billion.
  • Dividend: HUN pays an annual dividend of $.65 per share, which translates to an annual yield that of about 3.32%.
  • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for HUN is $16.63, and which translates to a Price/Book ratio of 1.17 at the stock’s current price. Their historical average Price/Book ratio is 2.8, which means the stock is current sitting more than 138% below a long-term target price at above $46 per share. If that seems over-optimistic, you can use their Price/Cash Flow ratio, which is more conservative, but still very attractive since it offers a discount a little above 23% above its historical average.



Technical Profile

Here’s a look at the stock’s latest technical chart.

  • Current Price Action/Trends and Pivots: The largest portion of HUN’s decline has come since the beginning of August, but the stock appears to be building a good consolidation base with support in the $19 price area. Immediate resistance is around $23 from the stock’s pivot high at the beginning of November. The stock would have to break above $23 in order to even begin to reverse its trend and start to build any significant bullish momentum. If the stock drops below $19, look for its next support to be in the $16 range.
  • Near-term Keys: The stock’s current support level might make a bullish short-term trade with call options tempting; but the best probability on the bullish side doesn’t come until the stock breaks resistance at $23 per share. The stock isn’t very far from a good signal for a bearish trade, and the strength of the long-term downward trend does suggest that shorting the stock or buying put options is probably the better bet in the short-term. Long-term, however, this looks like a terrific stock to buy and hold.