Huntsman Is Priced To Move

Do you believe in market timing? I don't, but that doesn't stop me from trying to get a good deal on the price of a stock. Jefferies & Co. downgraded Huntsman (NYSE:HUN) Dec. 6, 2011 from "Buy" to "Hold" on earnings concerns in 2012. The downgrade pushed the stock below $10 for the first time since September. Prior to that, it's spent just 21 of 84 months under $10 since going public in February 2005. It's priced to move.

Laurence Alexander, the Jefferies & Co. analyst who downgraded Huntsman, believes 2012 will be a tough year for the company for two reasons: It does 30% of its business in Europe, and secondly, its margins for titanium dioxide and methylene biphenyl isooctane will come under pressure. As a result, he's cut his earnings estimate 10% from $2.05 per share to $1.85. Alexander does suggest its stock could rally if the construction market improves. Factoring this into our valuation, we are looking at a forward P/E of 5.1, much lower than at any other time in the past.

Business at Huntsman from a historical perspective is excellent. Its third quarter results were the best ever with revenues, adjusted EBITDA and adjusted net income all higher than last year. Revenues increased 24% year-over-year to $2.98 billion; adjusted EBITDA increased 26% to $345 million; and adjusted diluted EPS improved by 32% to 45 cents. The nine-month numbers are even better. Analysts estimate its revenue for the entire 2011 will be $11.32 billion, 22.4% higher than in 2010 and the third-highest in the past decade. In terms of profits, its best year in the past decade was 2005 when it generated $1.44 billion in adjusted EBITDA. It could beat that in 2011, utilizing 17% less debt to do so. While margins might face some difficulties in 2012, watch out if the economy improves. (To know more about EPS, read How To Evaluate The Quality Of EPS.)

In August, Jon M. Huntsman, executive chairman and founder of Huntsman, bought 200,000 shares on the open market at an average price of $11.48. That's 16% higher than its Dec. 16 closing price of $9.70. With the Huntsman family owning approximately 43 million shares or 17.8% of the stock, I imagine we will see some more buying before the year's out, and that's always a bullish signal.

In the Q3, Huntsman announced restructuring plans for both its Advanced Materials and Textile Effects businesses. For the first nine months of the year, both divisions experienced a decline in adjusted EBITDA. If you remove those segments from its financials, we're looking at an extremely healthy business. The restructuring charges related to its announced plans amount to $190 million with future annual benefits of $90 million. Investors haven't seen such a good deal since the door crasher sales at Thanksgiving. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)

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At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.