The chemicals industry is one of the most economically-sensitive industries around, and many of the major chemical companies are very nearly proxies for global GDP growth. Specialty chemicals, though, is a subsector with some notable differences. It is certainly not fair to say that these companies are neither cyclical nor invulnerable to global growth trends, but many of these companies offer products or serve niches that tend to be a little more stable.
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There are ample worries about growth in the market today. If the economy is truly headed into a double-dip recession, these companies are not going to be notable outperformers. On the other hand, many of these stocks have been hit on growth worries and investors may find that these companies have either been sold too far, or at least merit spots on watchlists for the recovery in growth expectations.
Air Products (NYSE:APD)
If you want hydrogen or helium, there's a good chance you'll do business with Air Products. APD is a global leader in atmospheric and process gasses. These are critical inputs in many industrial and manufacturing processes and there are substantial advantages to scale and scope. That said, APD has about 20% exposure to the electronics industry (good in most periods, but arguably a negative today) and the company's profitability goals for 2015 are starting to look a little too ambitious. That said, the stock looks undervalued today and a 3% dividend yield is not a bad sweetener.
Splitting its business between polymer products, catalysts and fine chemicals, Albemarle is an interesting manufacturer of additives and intermediates with broad exposure to industries like plastics, agriculture and pharmaceuticals. Albemarle is one of the three major refinery catalyst manufacturers, a low-cost bromine producer, and a leading supplier of ibuprofen (a popular painkiller). Refining catalysts and pharmaceuticals tend to be in demand throughout all phases of the economic cycle, while exposure to markets like autos and electronics adds some cyclical (but not necessarily coincident) kickers.
Cabot is a good example of a specialty chemical company that is likely well off the radar of most investors. Carbon black, fumed silica, tantalum and cesium formate are not everyday concerns for most people, but they are critical inputs in products like ink, plastic, rubber and electronics. Interestingly, while products like carbon black require petroleum to manufacture, Cabot also gets some of that back as its cesium formate is used in drilling fluids (and demand increases with higher petroleum prices).
Eastman Chemical (NYSE:EMN)
Eastman is a player in diverse markets like plastics and fiber products. Some of its fiber products are used in cigarette filters and while that may not be a growing (or popular) market in North America, there are still a lot of smokers around the world. What's more, the company's fiber business is not very cyclical and the company has a favorable cost structure as it uses coal as a feedstock (as opposed to many chemical companies that use petroleum).
Huntsman may be a bit more like a regular chemicals company, given its iffy full-cycle returns on capital. Nevertheless, it has emerged as a leader in diverse markets like polyurethane, materials, performance products, and pigments. Huntsman has been very busy in recent years with a series of acquisitions and divestitures, but throughout that process, the company has emerged as a company more focused on higher-value, higher-margin products with less cyclicality.
More Names to Consider
Apart from these primary names, there are a number of additional ideas that investors should consider for their portfolio. Ashland (NYSE:ASH) has transitioned from a refining company to a specialized chemical company with interesting specialty water, paper and functional ingredient products. Cambrex (NYSE:CBM) is a thinly-traded producer of active pharmaceutical ingredients. Hexcel (NYSE:HXL) is a dedicated play on carbon fiber products (and gets more than 50% of its revenue from aerospace and defense), while PPG (NYSE:PPG) is not generally appreciated as the second-largest coatings company in the world. Last and not least, RPM (NYSE:RPM) pays a healthy (and stable) dividend from a business split between industrial specialty (two-thirds) and consumer specialty chemical brands like DAP and Rust-Oleum.
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