Returns On Capital At Ecolab (NYSE:ECL) Have Hit The Brakes
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Has the U.S. Chemicals Industry valuation changed over the past few years?
|Date||Market Cap||Revenue||Earnings||PE||Absolute PE||PS|
|Sat, 01 Oct 2022||US$705.6b||US$454.8b||US$45.5b||13.9x||15.5x||1.6x|
|Mon, 29 Aug 2022||US$809.6b||US$454.7b||US$45.5b||14.9x||17.8x||1.8x|
|Wed, 27 Jul 2022||US$776.1b||US$434.6b||US$44.1b||16.2x||17.6x||1.8x|
|Fri, 24 Jun 2022||US$751.1b||US$432.2b||US$44.3b||15.4x||16.9x||1.7x|
|Sun, 22 May 2022||US$846.2b||US$433.1b||US$44.4b||17x||19.1x||2x|
|Tue, 19 Apr 2022||US$861.4b||US$404.3b||US$38.9b||19.6x||22.2x||2.1x|
|Thu, 17 Mar 2022||US$814.2b||US$407.9b||US$41.4b||19.9x||19.7x||2x|
|Sat, 12 Feb 2022||US$834.5b||US$401.0b||US$39.5b||21.1x||21.1x||2.1x|
|Mon, 10 Jan 2022||US$903.1b||US$390.2b||US$38.7b||21.7x||23.4x||2.3x|
|Wed, 08 Dec 2021||US$880.8b||US$387.1b||US$38.7b||21.5x||22.8x||2.3x|
|Fri, 05 Nov 2021||US$901.8b||US$384.2b||US$37.8b||23.6x||23.9x||2.3x|
|Sun, 03 Oct 2021||US$828.8b||US$362.3b||US$32.2b||22.7x||25.7x||2.3x|
|Tue, 31 Aug 2021||US$862.2b||US$363.4b||US$32.1b||21.4x||26.8x||2.4x|
|Wed, 07 Jul 2021||US$846.0b||US$363.2b||US$32.1b||23x||26.4x||2.3x|
|Sat, 10 Apr 2021||US$819.6b||US$331.2b||US$20.3b||26.6x||40.3x||2.5x|
|Fri, 01 Jan 2021||US$735.3b||US$315.4b||US$15.5b||23.6x||47.6x||2.3x|
|Mon, 05 Oct 2020||US$633.6b||US$308.9b||US$7.4b||22.1x||85.5x||2.1x|
|Thu, 09 Jul 2020||US$568.9b||US$314.5b||US$9.8b||21.2x||58.3x||1.8x|
|Wed, 01 Apr 2020||US$450.5b||US$333.0b||US$13.5b||14.8x||33.4x||1.4x|
|Sat, 04 Jan 2020||US$645.5b||US$338.6b||US$15.2b||21.1x||42.4x||1.9x|
|Tue, 08 Oct 2019||US$617.7b||US$342.1b||US$21.2b||19.9x||29.1x||1.8x|
Which industries have driven the changes within the U.S. Materials industry?
|Fertilizers and Agricultural Chemicals||-1.00%|
Which companies have driven the market over the last 7 days?
|LYB LyondellBasell Industries||US$75.28||3.0%|
|DNA Ginkgo Bioworks Holdings||US$3.12||11.4%|
|CF CF Industries Holdings||US$96.25||2.6%|
Air Products and Chemicals
Summary After our APD and L'Air Liquide analysis, Linde is the most defensive company within the industry. Supportive macro to micro reasons to buy and hold the company. Compelling valuation with an ongoing buyback and an interesting backlog with double-digit IRR expectations. After our comment about the Q2 performance of L'Air Liquide ([[AIQUF]], [[AIQUY]]) and Air Products and Chemicals (NYSE:APD), here at the Lab, we have decided to deep-dive into Linde plc (LIN) - the largest global manufacturer of industrial gases. In short, the company provides all the atmospheric and process gases. In addition, Linde is an engineering company engaging its activities in designing and building turnkey processes and gas plants for the third-party players - this segment provides 9% of the company's total sales based on 2021 numbers. Linde was incorporated in 1879 and is based in the United Kingdom. Linde at a Glance Why are we positive? Our buy case recap is based on MACRO and MICRO reasons, some of our main key takeaways are taken from our sector publications, while others are company-specific. Starting with the former: (macro) - The European Union is supportive of CO2, hydrogen and green opportunities, thanks to Linde's exposure, we believe that the company is set for a sustainable growth rate; (macro) - Again, related to point 1) coupled with the ongoing Ukraine/Russia war, energy transition and independence has become one of the key topics for the European Parliament, this will further accelerate the company's development; (macro) - As already emphasized in our Infineon recent publication, Linde might take advantage of the EU's Chips Act: "the European Commission plans to allocate €11 billion in public funds for the research, design and manufacturing of semiconductors, with the goal of mobilizing a total of €43 billion of public and private investment until 2030". Recent news shows that Intel is planning to open a new chip lab facility in Italy for a total investment of more than $4 billion. There are rumors of new chip labs in Germany. APD has recently disclosed a new investment fully dedicated to the semiconductor industry. (macro) As already disclosed in our L'Air Liquide analysis, compared to the Internal Combustion Engine Vehicle, EV and BEV cars "are almost 50% more gas-intensive" - this certainly will be an upside for the whole sector;
International Flavors & Fragrances
Ginkgo Bioworks Holdings
Summary The company has a near-term revenue driver in the form of the Joyn Bio deal and the fertilizer shortage. On the financial side, the balance sheet is in superb form given the stage of the company's development. All-in-all, the company is very well positioned to have explosive growth during an economic winter. Ginkgo Bioworks (DNA) specializes in discovering molecules, processes, or strains with commercial value. That also includes engineering organisms to create customer value. In other words, Ginkgo is a biology engineering company. The company wants to build a platform for cell programming. The simplified idea is that cells are the printers of the physical world, capable of manipulating atoms. The company designs cell programs to generate outputs of biological products like therapy molecules, food ingredients, and chemicals. The advantage is the ability to scale to a level where it becomes cost competitive to produce through biology. For instance, there are petroleum-derived chemicals that the industry might replace through cell organisms programmed by Ginkgo. The potential of this technology is amazing. It is possible to engineer microbes to fixate Nitrogen in plants' roots, thus decreasing the need for artificial fertilizers. Or, we can even produce Hydrogen from microbes, which is more promising than energy-intensive electrolysis. The applications are endless. For instance, the biosecurity line of business skyrocketed in 2021. Most of this is thanks to the Covid virus and the need for passive monitoring of wastewater and air. Ginkgo Bioworks Ginkgo's revenue spurt is impressive. However, I believe that it won't be the last we'll see. Why am I so optimistic? Well, the company seems to be in a position to rapidly take advantage of global problems by offering engineered solutions for them. DNA engineering might be the solution to a lot of our energy problems. The twentieth century marked our control over chemical reactions of existing rich energy resources, similarly, the twenty-first century might witness the start of our control over biology to replenish our energy resources. Microbes engineered to enhance hydrogen production might be the viable way to produce hydrogen instead of water electrolysis. Ginkgo's platform So, what is the advantage of Ginkgo? Its platform. Ok, I guess you keep hearing this argument many times but let's do a deep dive on this one. Two assets are the foundation of the company's platform: Foundry and Codebase. The Foundry is where the company designs, writes, and inserts the DNA into the cells. Foundry includes software and automation tools used in this engineering process, facilitating testing and iterating. According to the management, the output has increased three times annually, while the costs have decreased by 50% per year. The codebase is the database of biological assets (cells and code) that the company is constantly growing, and it can leverage for future projects, improving the odds of success. Together these two assets should improve with scale and, in turn, drive more scale. Rationale for investing As Stanley Druckenmiller says, the market is not about what is happening now but what might happen in 18 months. In my opinion, in the next year and a half, there is a big chance of the developed world facing a shortage of food supplies due to the war ramifications. Nowadays, the largest threatened product group is nitrogen-based fertilizers. The production derives from the Haber-Bosch process, which involves mixing the nitrogen in the air with hydrogen at high temperatures and pressure to produce ammonia. The supply chain from Russia, Ukraine, and Byelorussia is already unreliable. Additionally, Polish producers are halting fertilizer production due to natural gas prices. An energy crisis coupled with a food security crisis is a recipe for disaster. I'm not very optimistic about the impact on the developed world. However, if there is hope to solve these problems, I think it must come from mastering biology. Joyn Bio, the joint venture formed between Ginkgo and Bayer to develop ag biologicals, is a good example of this pursuit. Bayer was interested in testing Ginkgo's synthetic biology capabilities in the agricultural field. One of the most interesting highlights is the nitrogen-fixing program. The joint venture dissolved in the first half of 2022, but the partnership will remain. Both companies will split the Joyn Bio assets, with Ginkgo getting research assets (IP, intellectual rights, research staff). The product concepts will go to Bayer, which will commercialize them. There are some nuances. One of them is that Ginkgo will receive royalties on Bayer's net sales of the Nitrogen-fixer program that Bayer will commercialize. Ginkgo is buying the West Sacramento research site owned by Bayer (83 million in cash or stock). In my opinion, this deal can be huge for Ginkgo. First, the company will have a solid foot in the agricultural biologicals market through Bayer. Bayer already has a retail footprint in that market, which means it has the scale to commercialize the Nitrogen-fixer program. Second, the company will be adding resources to develop other agricultural solutions, which I believe will be in demand during the following years. In my opinion, revenues coming from the ag bio business might have a huge impact in the medium term, akin to the effect of the covid vaccine on Moderna. If those royalties materialize, the company might cash in enough revenues to finance the next round of growth. Ginkgo Bioworks Company development Be as it may, the company is perceived as a biotech startup and treated as such. As you can see by comparing Ginkgo's price performance against the iShares Genomics Immunology and Healthcare ETF (IDNA), the company has underperformed the IDNA by 26% in the previous year. Seeking Alpha One interpretation is that investors see the company as a cash-burning machine in a scenario of economic winter and liquidity contraction. In my opinion, this couldn't be further from the truth. The company seems to hemorrhage cash when you look at the bottom line, but the cash flow shows a more benign situation. Ginkgo Bioworks Ginkgo Bioworks The 1.3 billion dollar loss becomes much less sensational when you check that the operating cash flow was just a loss of $120 million. The main component of the income statement loss is stock-based compensation which explains the difference between the two metrics. The result is that, unlike many other tech companies, Ginkgo has been capable of maintaining a solid balance sheet. The current ratio is more than 10, which is a good indicator that Ginkgo is in great shape to navigate the liquidity contraction. Seeking Alpha Investor Takeaway Ginkgo has a couple of underlying trends going in its favor. First, the energy constraints in Europe open an opportunity for ag bio. Second, the macro scenario is daunting at a time when most tech companies have burned through lots of reserves, but not Ginkgo. The natural gas constraints might be the catalyst for commercial adoption of the nitrogen-fixing program. That, in turn, could yield royalties to Ginkgo. The increase in revenues would come at no extra cost for the company and could significantly contribute to the company reaching the 1 billion revenue watermark. If that happens, a couple of chain reactions could get on course. First, the 21% short interest in the stock could get squeezed, sending the price to sales multiples higher. Second, the extra revenues will help the company finance the younger branches of the company's R&D.
Summary Analysts have lowered their earnings forecast after Huntsman released their quarterly update. Huntsman Corporation management has agreed to sell its Textile Effects business group for a great price. Valuation metrics show that Huntsman is attractively valued. If there were growth catalysts, I would consider a position in Huntsman. Introduction Huntsman Corporation (HUN) is a chemical company that mainly specializes in the production of polyurethane. Like all chemical companies, the shares have been penalized on the stock market because profits have been adjusted downwards due to higher energy prices in Europe. Like Huntsman, LyondellBasell (LYB) produces polyurethane, among other things, and the share prices of both companies are almost in line. Huntsman's 10-year total return is somewhat lower than LyondellBasell's. And what we can clearly see from the chart below is that both chemical companies offer good buying opportunities when trading low. Data by YCharts Both Huntsman and LyondellBasell stocks appear to be trading low, but I have the stocks on hold as there are no growth catalysts. Huntsman's management is a good capital allocator, but the higher energy costs in Europe, the lower demand, and the COVID lockdowns in China are reasons to hold back with purchases. When there is a positive outlook, I will consider a position in Huntsman. Company Overview Huntsman mainly specializes in the production of polyurethane. Polyurethane is mainly used as an energy-saving insulation material, lightweight and performance material in the automotive industry, comfort foam for bedding and furniture. It is also used as an elastomer in shoes by companies such as Nike (NKE). Company overview (2Q22 Investor Presentation) The Polyurethane market is expected to grow 3.6% from 2022 to 2030. Main growth catalysts are the sustainability of homes and buildings, and the growth in demand for cars. Quarterly Earnings Were Disappointing Huntsman has remained profitable in recent years, even during the coronavirus crisis. According to the SA HUN Ticker Page, 11 analysts have revised earnings forecasts downward and expect earnings per share growth after 2024. EPS (SA HUN Ticker Page) Analysts have lowered their earnings forecast after Huntsman released their quarterly update. Huntsman lowers their third quarter EBITDA outlook to $260 - $280 from $310 - $355 excluding EBITDA effects from the sale of Textile Effects division. This is due to higher energy costs in Europe, lower demand for Polyurethanes and Performance Products, and COVID lockdowns in China. Management explains that the United States is their resilient market, but they are experiencing headwinds as residential housing has slowed down. As a result, Huntsman is further optimizing their costs and expected an annualized run rate of $170M by year-end. They evaluate further cost reduction and import products from their facilities from the United States into Europe. Selling Textile Effects Business Group For A Great Price Huntsman has agreed to sell its Textile Effects Business Group to Archroma for $718M. This division had annual revenues of $772M and an adjusted EBITDA of $94M for the past 12 months ending June 30. The Textile Effects business is an international player in the production of textile dyes and textile chemicals to improve textile colors and improve fabric performance. In 2021, this business segment accounted for about 10% of revenue, and the adjusted EBITDA margin was 7%. 2021 Revenue Adjusted EBITDA EBITDA-margin Polyurethane $3,584 $472 13% Performance Products $1,023 $164 16% Advanced Materials $839 $130 15% Textile Effects $597 $42 7% It is a strategic move by Huntsman to separate the Textile Effects business segment from their core businesses, as the adjusted EBITDA margin of their other segments is more than twice as high. This benefits Huntsman's profitability. The Textile Effects business segment is dependent on the textile market, which is often volatile in times of economic recession. Sales from this segment decreased by 22% year-on-year in 2020 during the corona pandemic. Adjusted EBITDA fell by 50%, the strongest decline of any of Huntsman's business segments. Huntsman's management is a good capital allocator to sell their least profitable and volatile business segment at a price higher than the price Huntsman is currently quoted in the market. Huntsman's EV/EBITDA ratio is 3.1 and the Textile Effects business is being sold at an EV/EBITDA ratio of 8.2. A good deal. Dividends And Share Repurchases Huntsman's dividend has grown an average of 6.2% over the past 10 years, with a dividend yield of 3.6%. Dividend growth history (SA HUN Ticker Page) The dividend yield is well backed by their free cash flows and net income. Their dividend payout/FCF 0.26 over 2021 and 0.65 over 2019. Management buys back Huntsman's own shares, reducing the number of shares outstanding and increasing the dividend per share. Over 2021, the buyback yield was a solid 4.1% and the stock rose through February 2022. Cash flow highlights (SEC filings and author's own calculations) The share repurchase program continued into 2022 and this year management has repurchased $500 million worth of shares, more than in previous years. However, the share price has fallen since. Nearly 90% of the outstanding shares are held by institutional investors, only 4% by the public. If institutional investors reduce their position in Huntsman, this has major consequences for the share price. It is important to follow the institutional investors closely. Morningstar has a listing of Huntsman's ownership. Valuation Metrics Show Huntsman Is Attractively Valued Huntsman has historically been valued very low by EV/EBITDA metrics. Based on this metric, Huntsman is rated more attractively than LyondellBasell, which I wrote an article about earlier. The chemical sector is experiencing problems due to high gas prices and a shortage due to Russia no longer supplying gas. Data by YCharts JPMorgan downgrades Huntsman because its dividend yield is lower than Dow and LyondellBasell. Huntsman dividend payout ratio is on the low side (2021 dividend payments/FCF = 26%), so I don't see this as a worthy argument as they can easily increase their dividend.
Summary Good days might be ahead for LSB industries due to potential decrease in global nitrogen products supply and the resulting hike in prices. Nitrogen prices are expected to keep rising, positively affecting the company's fortunes. The company's stock performance is heavily tied to commodity prices and the global conflict affecting them. I am bullish on the stock and expect it to trade at around $18 by the next 12 months.
Sociedad Química y Minera de Chile
CF Industries Holdings
Summary The energy crisis in Europe is forcing European fertilizer companies to halt production. This supports more North American fertilizer demand as European supply gets cut off. CF's recent insider sales are a small proportion of their tiny holdings of the company. Clearly, insiders will look to diversify their position over time. Earlier in 2022, investors bid up CF, but capital flows have now moved out. However, the fundamental case today is even stronger than at the start of 2022. Presently, CF is priced at 5x free cash flow. This low valuation leaves plenty of margin of safety for negative expected outcomes. Investment Thesis I recently made the case to DVR members that CF Industries (CF) is very well positioned for high nitrogen prices. Here's the context, with natural gas prices in Europe sky-high there's simply no way for European fertilizer producers to compete against US-based manufactured fertilizer. Even if at the start of 2022 investors came to realize that, capital flows have still pulled back and have migrated away. This has left CF priced at 5x this year's free cash flows. I lay out different scenarios to help readers think through some of the positive and negative considerations affecting this investment. Ultimately, I'm confident you'll agree, that this is a particularly interesting and exciting investment opportunity. Putting Recent Insider Sales in Context There was a big deal made on Seeking Alpha that insiders sold $18 million worth of stock. However, keep in mind that the biggest sale, $11 million worth of stock, was made by CEO Tony Will. And despite CEO Will selling such a chunk of his holding, he still has $32 million worth of CF stock. Indeed, if the CEO and others didn't sell his stock their stock from time to time, how else would they diversify their holding? Having $32 million worth of equity in a company is plenty of skin in the game. Particularly given that management will get further stock-based compensation over time. I personally don't see these equity sales in a negative light. Why CF Industries? Why Now? CF Industries produces nitrogen fertilizer products. DTNPF.com As you can see above, nitrogen prices, those of concentrated ammonium nitrate solution (''UAN'') have come down in the past few months. The reason for this is that nitrogen prices are so high relative to last year that many farmers are now working very hard to put off buying more until next year. But the reason why I'm bullish on CF is that I recognize that with energy prices so high in Europe, there's simply no way for European peers to profitably produce fertilizer. However, the demand for fertilizer hasn't gone away. It's simply that it's much cheaper for farmers to get the fertilizer from the US and ship it across rather than buy it from local farmers at exorbitant prices. This leaves North American fertilizer producers with a moat around their fundamentals, as companies elsewhere in the world don't have access to the very cheap natural gas feedstock that North American producers such as CF Industries have. Even though, it should be noted that CF Industries also has some minor exposure to Europe. A Picture Worth a Thousand Words CF Industries Q2 2022 presentation Altogether, through CF's strong free cash flow generation, together with consistent buybacks, CF Industries has been consistently reducing the total number of shares outstanding. The bars show free cash flow increasing significantly in the past two years, while the total number of shares outstanding, the green line, is coming down. That means more free cash flow per share. Along these lines, CF's management said during their Q2 2022 earnings call, Given this outlook, we expect to generate substantial free cash flow for an extended period. This will enable us to return significant capital to shareholders, while we also make disciplined investments to grow our low-carbon ammonia production footprint. CF Stock Valuation - Approximately 5x FCF The reason why CF isn't more expensive is that it's difficult to get much visibility right now into what price nitrogen will be at in 2023. Simply put, there's a lot of uncertainty in the market, and investors hate uncertainty second only to bad news. That being said, even if in 2023 prices come down around 15% to 20%, that wouldn't take away from the fact that CF is still very attractively priced. In fact, if CF Industries' free cash flow only increases slightly from $3.6 billion over its trailing twelve months, to $4 billion by year-end, this would still leave the stock priced at just 5x this year's free cash flows. Now, as noted above, this does not detract from the fact that investors right now have absolutely no visibility into 2023. That typically wouldn't be a huge problem. But given that the market is so stretched and volatile investors are probably worried that nitrogen prices could seriously sell-off.
Summary Albemarle's revenue has gone parabolic on the back of material lithium demand. This is being driven by the global effort to reach net zero. Governments around the world are increasingly instituting dates to phase out sales of fossil fuel vehicles. The Inflation Reduction Act is set to compound this demand and open up a new era of unrestrained runaway growth for Albermarle's core business. Charlotte-based Albemarle (NYSE:ALB) is the world's largest lithium producer, mainly supplying the growing demand for electric vehicles. The company, founded in 1887, also produces Bromine and Catalyst solutions. The former serves a number of use cases from agricultural chemicals, pharmaceuticals, and flame retardants. Lithium by far forms the most pertinent bull case for Albemarle and the key driver of investor interest in the company. The chemical element is used as the key ingredient for lithium-ion batteries, the principal battery chemistry for electric vehicles. This places Albemarle at the front of the decarbonization of transport, once a fringe request by environmentalists at the turn of the new millennia but now core policy objectives for some of the world's largest economies. On the back of 2021's United Nations Climate Change Conference was the Glasgow Declaration. It commits signatories to ensure sales of all new cars and vans to be zero emission by 2035. Hence, the list of states and countries on a planned phase-out of combustion engine vehicles has grown significantly. This is not a list of minnows. California, the European Union, the United Kingdom, Japan, and South Korea all feature on the now rapidly growing list that is expanding Albemarle's total addressable market. The long-term outlook for EVs is strong. Global sales of EVs reached 6.6 million in 2021, more than double its year-ago figure. Highlighting just how staggering growth has been, just 120,000 EVs were sold globally in 2012. Last year saw that figure being sold in a week with 10% of cars sold in 2021 being electric, 4x the market share in 2019. Growth is fast becoming exponential, albeit partially slowed down as a result of the current weakening macroeconomic environment. Revenue Goes Parabolic As Demand For Lithium Carbonate Goes Beyond Point Of No Return The company last reported earnings for its fiscal 2022 second quarter which saw revenue come in at $1.48 billion, a 91.2% increase over its year-ago period and a marginal beat of $622,520 on consensus estimates. Whilst there was healthy growth across all its divisions with Bromine and Catalysts sales jumping by 35% and 42%, respectively, net lithium sales surged by 178% to reach $891.5 million during the quarter. This constituted 60% of total revenue and was driven by higher pricing as well as an increase in sales volumes. ALB Revenue (Quarterly) data by YCharts Whilst net income fell to $406.8 million from $424.6 million in the year-ago quarter, adjusted EBITDA grew by 214% year-over-year to reach $610 million with margins at 41%. Albemarle Further, whilst cash flow from operations was negative at $145.87 million, the company now expects to be cash flow positive this year with approximately $150 million in positive free cash flow expected at the midpoint of their guidance. For the year, Albemarle expects adjusted EBITDA will rise by at least 500% as average realized pricing is expected to increase by at least 225%. Full-year volume sold is expected to rise by at least 25% at its midpoint as the company continues to invest in new capacity to meet demand. Several projects are underway in China and a number are in the early stages of planning for the US. The recently signed Inflation Reduction Act which allocates $370 billion over 10 years for decarbonization is set to drive even greater demand for lithium over current baseline projections. Critically, the Act will see greater demand pull for lithium for utility-scale lithium-ion battery storage as renewable energy is set to undergo a generational boom. Solar and wind are expected to rise to a forecasted 80% of electricity production by the end of the decade, up from around 20% of production currently.