Over the last year, one of the best sectors of the stock market’s rally back to, and even above pre-pandemic levels has been the Materials sector. From last year to a fresh high this week, the sector had increased in value by almost 70%, as measured by the S&P 500 Materials Sector SPDR (XLB).
This is a sector that I like to pay attention to as a barometer for the underlying relative health of the economy, because the companies that comprise it produce or mine many of the raw materials that make up the building blocks used to create most of the finished goods we use every day. The sector includes industries that cover chemicals and plastics, construction materials, paper, forest, and packaging products, as well as metals and minerals – which means that in some form, this sector touches practically every other segment of the economy in one more or another.
As a reflection of broad economic health, it isn’t that surprising that a lot of the momentum that helped to drive the sector higher came on the back of favorable economic indicators as state and global economics began to to reopen, facilitated by aggressive federal stimulus and continued accommodative monetary policy from the Federal Reserve. Vaccine administration has helped to curb infection rates and facilitate reopening of social and business activities that have been severely restricted for more than a year. That supports the view, held since early this year that the second half of 2021 is when most U.S. activity will see a return to some semblance of the “old normal” that existed prior to the pandemic. That is a forecast that bodes well for the entire economy, and certainly might be expected to act as an ongoing tailwind for Materials stocks as well.
Huntsman Corp (HUN) is a good example of the sector’s performance over the last year. This is a company that has benefitted from a homebuilding industry that has been surprisingly robust over the past year, as residential construction continues to boom in numerous parts of the country. From its bear market low in March at around $12, the stock more than doubled in price by the end of 2020, and even drove to a new high at the start of this week at $32. Helping to drive the stock near to its pre-pandemic highs along with sector strength earlier in the year were strong indications the company had managed to improve their operating profile since the beginning of the year, which also helped them increase their financial liquidity and boost the stock’s intrinsic value. The last couple of quarters of 2020, however revealed a pattern of declining Free Cash flow and narrowing overall profitability severe enough to shift the value argument significantly against the stock’s upward trend. The last couple of earnings reports indicate that pattern may be stabilizing; with a new set of fundamental metrics factored in, let’s take a look at where HUN’s “fair value” price should be 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 $6.9 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased nearly 127.6%, while revenues grew 15.3%. In the last quarter, earnings were 29.4% higher while revenues increased by 10.13%. HUN’s operating profile appears to have reversed its previous decline, however it did narrow in the last quarter. In the last year, Net Income was 6.58% of Revenues, but decreased to 4.52% in the last quarter. It is worth noting that nine months ago, HUN’s quarterly Net Income/Revenue was -4.97%, which can be taken as a strong indication of stabilization and improvement in operating profitability.
Free Cash Flow: HUN’s free cash flow is $100 million. This is marks a decline over the last year, when Free Cash Flow was $375 million, but has also improved from $17, and then $79 million over the last two quarters. The current number translates to a Free Cash Flow Yield of 1.45%. It is also noteworthy that HUN’s Free Cash Flow saw a peak at $1.2 billion in June 2018, and has declined steadily from that point; it helps to put the last year’s decline into perspective and, along with the company’s narrow margin profile should add to the cautious outlook moving into the rest of the year.
Debt to Equity: HUN has a debt/equity ratio of .40. This is a conservative number that has also decreased since the beginning of 2020 from .77. HUN’s balance sheet has also seen declines over the last year but generally remains healthy, as total cash in the last quarter was about $673 million, while long-term debt is $1.5 billion.
Dividend: HUN pays an annual dividend of $.75 per share, which translates to an annual yield that of about 2.42% at the stock’s current price. It is also worth noting that management increased the dividend in the last quarter, from $.65 per share.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth. My normal preference is to work with a combination of Price/Book and Price/Cash Flow analysis; however given the company’s current Free Cash Flow numbers, a practical Price/Cash Flow becomes impossible. That means that the most practical historical analysis comes from the Price/Book ratio, where HUN’s increasing Book Value per share, currently at $16.84, which is a useful improvement from $15.07 in mid-2020 – suggests that HUN’s “fair value’ target is at around $31. That is pretty much inline with the stock’s current price, and also puts a useful bargain price at around $25.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The diagonal red line on the chart above traces the stock’s upward trend over the past year from a low at around $14 to its high point around $32 just two days ago. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock’s trend over the past year has been impressive, with momentum increasing to the bullish side in late April after the stock had been consolidating for most of 2021. Current resistance is at $32, and immediate support should be at around $29.50 per share. A push above $32 could have upside to about $34.50 to $35, based on the distance from the last resistance break to its current high. A drop below $29.50 should see the stock drop to about $26.50 before finding new support.
Near-term Keys: HUN’s current upward trend is intriguing, and might offer tempting fodder for a short-term trader right now. The truth is that the stock doesn’t offer a compelling, or even useful value proposition right now, which means that the best trading opportunities lie in short term trades. If the stock can find a pivot point anywhere between its current price and $29.50, there could be a useful opportunity to buy the stock or work with call options, with a near-term profit target at current resistance at $32. A drop below $29.50 could be a signal to consider shorting the stock or buying put options, with $26.50 providing a useful profit target on a bearish trade. HUN is a company with a sold balance sheet and an increasing dividend, which works in its long-term favor; but its narrowing Free Cash Flow is threatening to dip into negative territory, which along with narrowing Net Income is a big red flag for now. Until improvement in both measurements can be seen, I think long-term investors should take a cautious approach with HUN.