As the market began to move into the final quarter of the year, things seemed to be reaching a tipping point; many analysts were even forecasting that the market would repeat its bearish performance of the end of 2018, when all of the major indices tested bear market levels. As has been the case throughout the year, however, the market has used even mere hints of progress in trade between the U.S. and China as a reason to keep the markets trading back near to its all-time highs.
While the market may be able to use the news in a mostly bullish fashion going in the near term, the truth remains that a deal isn’t done, and is likely to continue to take some time to finalize. Still, progress continues to be positive, and the market continues to be anxious for indications that a deal can be reached, and so progress of any kind is going to be used as a reason to be more optimistic. In the near-term, that bodes well for stocks in any sector with exposure to trade and tariff risk, including Materials.
One of the most interesting stocks in the Materials sector is Huntsman Corp. (HUN), a mid-cap Chemicals company that has followed the sector’s trend this year, but to much more volatile extent. The stock hit a multi-year low in December 2018 before rallying almost 44% around the end of April. It then dropped back to that multi-year low and has since managed to rebound a little over 25% from that point. Despite those positive moves, the stock remains at the extreme low end of its historical ranges. HUN’s fundamentals are generally solid, but are also showing some signs of weakness that seem to reflect some of the economic pressures that have come from increasing commodity costs and from trade difficulties, as U.S. companies in this sector derive a significant portion of their revenues from exports to China. Does that mean HUN is a stock to say away from, or does it create a useful value-oriented opportunity for the smart long-term investor?
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 $5.3 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined a little over -37%, while revenues dropped -8.7%. In the last quarter, earnings increased 37% while revenues grew by 7.8%. The company’s margin profile has been negative over the past year, but appears to be improving; Net Income as a percentage of Revenues was 5.01% in the last quarter versus -1.36% in the last twelve months.
Free Cash Flow: HUN’s free cash flow is healthy at $500 million. That translates to a Free Cash Flow Yield of 9.3%. It is noteworthy that Free Cash Flow has declined from $894 million earlier this year, and about $1.2 billion since June 2018.
Debt to Equity: HUN has a debt/equity ratio of .96. This is a conservative number, but it increased from .57 in the third quarter of 2018. The improvement in the company’s Net Income is also reflected by an increase in liquidity, which is a positive development. Total cash in the last quarter was $449 million, while long-term debt is $2.7 billion.
Dividend: HUN pays an annual dividend of $.65 per share, which translates to an annual yield that of about 2.8%.
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 $12.29, and which translates to a Price/Book ratio of 1.89 at the stock’s current price. HUN’s Book Value improved earlier in the year from $11.53 per share. Their historical average Price/Book ratio is 2.46, which means the stock is current sitting almost 30% below a long-term target price at around $30 per share.
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 downward trend from the beginning of 2018 to its low point in early June. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock has increased from that recent low at around $17.30 per share, with a strongly bullish push to a high around $23 in early September, with the stock hovering at about that same level since then. Current support is around $21.50, setting up a short-term consolidation pattern over the past month. A break above the 38.2% Fibonacci retracement line at around $24.50 could give the stock room to run to about the 61.8% retracement line, which sits at around $29 per share. A drop below support at $21.50, on the other hand could see the stock drop near to its multiyear low between $17.50 and $18.50 per share.
Near-term Keys: The stock’s recent rebound from its trend low makes looking for a short-term bearish trade a very low probability trade; in the short-term, the best likelihood of success is on the bullish side, with a break above $24.50 offering a good signal to buy the stock or to consider working with call options with an eye on the stock’s high at around $29. From a value perspective, the company is showing some useful signs of improving fundamental strength, with a bargain proposition that remains attractive at current price levels. Progress on the trade front is likely to boost the sector as well, which means this could be a good time to think about HUN as a solid long-term opportunity.