Chemicals: Is the worst behind us?
Materials
Frank Mitsch sees early signs of stabilisation in the chemicals sector, despite short interest sitting at 52-week (or longer) highs and persistent investor concerns around potential dividend cuts. While he remains cautious on Tronox and Huntsman’s payouts, he considers dividends from Dow and LyondellBasell to be safe. Roughly 60% of 1Q results landed within 4% of his expectations, with Olin, Corteva, FMC and Celanese leading on beats vs. the Street. Westlake was the notable miss, due to underperformance in its PEM segment, partly from unplanned downtime. After over two years of sector underperformance, exacerbated by the overreaction to Liberation Day, Frank believes the worst may be behind us; hence his recent upgrades (to Buy) on DOW, LYB and PPG. He has also been heartened by how the credit markets have been open to companies such as CE and OLN.
Edition: 212
- 30 May, 2025
Materials
Market confusion surrounds its true earnings power - WLK has been very active on the M&A front recently and now generates around two-thirds of its earnings from chlorovinyls. Since hitting its Mar 2020 lows, its share price, while keeping pace with ethylene/polyethylene-biased name LyondellBasell, has significantly underperformed the company’s main chlorovinyl peer, Olin. Hassan Ahmed believes this underperformance is unwarranted and makes the case that WLK has been acquiring businesses that have a far more stable earnings profile, which should reduce the company’s overall cyclicality and result in a multiple re-rating.
Edition: 182
- 22 March, 2024
Materials
Given OLN’s impressive return profile and outperformance, relative to peers, during CEO Scott Sutton’s tenure, Hassan Ahmed wonders why the company's Board was unable to strike a deal to retain his services. However, despite Hassan’s frustration over Sutton's upcoming departure, he believes many of the strategies implemented by the outgoing CEO are sustainable. Furthermore, OLN already seems to be trading below trough valuation levels, highlighting the stock's attractiveness. Hassan's 12-month TP is $75 (55% upside).
Edition: 170
- 29 September, 2023
Declining Businesses: Best short candidates
Atlantica Sustainable Infrastructure (AY) - Faces competition from new renewable energy companies and weaker than expected demand for electricity. Sales growth averages just above zero since 2017. EBITDA and FCF have declined since 2021. Trades at 34x 2024 earnings.
Olin (OLN) - Weakened demand in its core chlor-alkali business, increasing competition and higher raw materials prices. Sales declined for four quarters (incl. -35% drop last Qtr). While current year growth forecasts have been cut, out-year growth forecasts have been increased.
Seagate (STX) - The demand for hard drives has been declining as storage shifts onto the cloud. Sales have declined dramatically for five quarters. Margins have plummeted and leverage has shot up (when measured against collapsing EBITDA).
Edition: 166
- 04 August, 2023
Chemicals: Recent declines are overdone
Materials
Chemical equities' performance is worse than anything we have seen in recessionary periods over the last 60 years, suggesting limited downside and significant upside for some. Sector balance sheets and cash flows are far better positioned today than in 2008/09. For 2023, Hassan Ahmed prefers companies that may benefit from catalysts (Tronox and Braskem), secular changes within their markets (Olin), or have high China / Europe exposure (Covestro and Tronox). He sees PureCycle as a high-risk / high-return play - TP $30 (300%+ upside).
Edition: 151
- 06 January, 2023
Materials
Highly attractive FCF yield and unjustifiably depressed multiple - share price is down ~20% from Nov 21 highs despite guiding to an above-consensus 2022 and experiencing a 177% uptick in consensus 2022 EBITDA estimates since the start of 2021. Hassan Ahmed explains why investor concerns surrounding spot Asian caustic prices, Epoxy segment earnings, supply / demand fundamentals, and an earnings “cliff” are overblown. OLN is expected to generate $8bn+ of levered FCF over the next five years (equivalent to its current M/cap). Trades at a FCF yield of 23%. 12-month TP $85.00 (65% upside).
Edition: 129
- 18 February, 2022
Chemicals: Macro stars aligned
Materials
Global economic stimulus, a weakening USD, rising vaccination rates and lean inventories are perfectly aligned for continued commodity chemical strength, with higher oil prices providing an additional tailwind. Multiple compression at Olin, Chemours, Huntsman and Tronox seems excessive, particularly when compared to earnings growth prospects. FCF yields at Venator, Braskem and Trinseo are very attractive. For 2022, Hassan Ahmed prefers companies that may benefit from activism/M&A-like catalysts (Braskem, Huntsman and Tronox), secular changes within their markets (Olin), or have underappreciated proforma earnings power (Trinseo and Westlake).
Edition: 126
- 07 January, 2022