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Stock Screen: Best & Worst Performing Industries - November 1, 2013
Among the many features found in each week’s edition of Value Line’s Selection & Opinion service is a list of the seven best and worst performing industries over the past six weeks. These rankings can be found on the inside back cover of Selection & Opinion. The roughly 1,700 stocks in the Value Line universe are currently divided among about 100 industries. Notably, for the purposes of calculating these results, the performance of each stock is equally weighted to the others in its industry (i.e., irrespective of market capitalization).
The latest six-week period covered in our Industry Price Performance rankings was a relatively good stretch for equities, as the bull market continues to pick up steam following a modest setback during August. For example, the S&P 500 Index increased 3.9% from September 17th to October 29th, and is holding onto a year-to-date gain of nearly 25%.
In this environment, an industry needed to climb nearly 10% over the past six weeks to qualify for a spot in our top seven. The Air Transport Industry rose 12.0% to take home the top spot, narrowly edging out Newspapers (up 11.8%). Other groups helping to lead the market higher included Semiconductor Capital Equipment (10.8%), Natural Gas-Diversified (10.6%), Healthcare Information Services (10.2%), Chemical-Diversified (9.9%), and Public/Private Equity (9.7%).
In looking for investment ideas among these seven industries, we are taking a closer look at two of the Chemical-Diversified stocks, Celanese Corp. (CE) and Huntsman Corp (HUN). These stocks advanced 13% and 19%, respectively, over the past six weeks, helping to lift that group to its lofty standing in the latest rankings.
Celanese Corp. produces and sells industrial chemicals, primarily in North America, Europe, and Asia. It processes chemical raw materials, such as methanol, carbon monoxide, and ethylene. The company traces its roots back nearly century, to 1918, when it started out as the American Cellulose & Chemical Manufacturing Company. More recently, Celanese was owned for a two-year stretch by private-equity fund manager Blackstone Group (BX) before becoming publicly traded following its 2005 IPO.
The company has struggled with lackluster sales for the better part of two years, but appears to be making progress adapting to this environment. September-quarter sales edged ahead slightly from the prior-year period, while earnings made a big jump, rebounding 45%, to $1.07 a share, as profits benefited from productivity initiatives. The positive comparisons should continue in the December period, though full-year share net will likely finish essentially unchanged from 2012’s tally of $3.81, reflecting Celanese’s weak results in early 2013.
Looking into next year, the company’s prospects look promising. New products should support more dynamic top-line growth. In particular, Qorus, an artificial sweetener, stands a good chance of making inroads in the beverage and dairy markets. In all, revenues seem likely to climb 6%, to $6.9 billion, which would represent the first positive annual comparison since 2011. With this tailwind, share net ought to rise about 35%, to $5.15.
In all, CE stock looks to be suitable primarily for investors with a six- to 12-month focus. The earnings recovery now under way should continue in the quarters ahead, underpinning support for these shares. Still, this equity’s investment case includes a number of caveats. For starters, the P/E earnings ratio of nearly 14, despite being noticeably below the Value Line median (18.8), appears a bit rich relative to this issue’s historic levels. Too, the dividend yield here is subpar compared to the Value Line median (1.3% versus 2.0%), and the stock gets a low score for Price Stability (20 on a scale of 5 to 100), meaning investors should anticipate volatile price action.
Elsewhere in the industry, Huntsman Corp. is a global producer of differentiated chemicals, with annual sales of roughly $11 billion. It was founded in 1982 by Jon M. Huntsman, Sr. and had its initial public offering in 2005. Mr. Huntsman continues to serve as Executive Chairman of the Board and remains the chemical maker’s largest shareholder, owning 16.3% of the outstanding stock (as of last April). The company currently does business in over 100 countries and generates roughly two-thirds of its revenues outside the U.S.
Huntsman’s results of late have left something to be desired. Sales for 2013 are likely to be flat with the prior year, while earnings look set to tumble 60%, to $0.60 a share. Investors, though, don’t seem overly concerned, as the stock has modestly outperformed the broader market over the past 12 months. Notably, better results appear to be in the cards for 2014, with revenues likely climbing at a high single-digit clip, while share net ought to rebound to $1.65, above the previous post-recession high of $1.51 reached in 2012.
Moreover, the market appears to have a generally positive view of the strategic moves announced by the company in recent months. For starters, the Performance Products division (22% of sales) is repositioning its surfactants business in Europe. The objective is to reduce its exposure to commoditized product lines, while building up differentiated-surfactant offerings. In addition, the company has reached an agreement to acquire Rockwood’s titanium oxide (TiO2) business and merge it with its own. The transaction, which ought to close in the first half of next year, would make Huntsman’s the second-largest player in the TiO2 market, while creating the potential for sizable synergy savings that should make the deal highly accretive to earnings.
In view of these recent actions and other potential moves, including the prospect of an IPO of TiO2-related businesses by mid-2016, HUN stock has some speculative appeal. Overall, though, most investors should proceed cautiously. The cost of the proposed TiO2 transaction, $1.1 billion in cash plus $225 million in unfunded pension liabilities, would put an added strain on an already heavily leveraged balance sheet. With this in mind, long-term total-return potential for HUN stock appears unexciting at the current valuation, particularly on a risk-adjusted basis.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.