Chemicals maker Huntsman (NYS: HUN) couldn't do what its peers could -- that is, boost profits by passing on higher costs to customers. In spite of higher revenues, the company's bottom line remained flat, missing Street estimates.
But why did the shares plunge an astounding 31%? Was it just because of the numbers, or is there something more that we can't see upfront? Let's dig a little deeper to find out.
Huntsman's revenues jumped 25% from the year-ago quarter to $2.9 billion. While all the other segments reported a rise in revenues, its textile division continued to be the dampener. Low demand and manufacturing constraints led to a 6% fall in the segment's sales.
Not surprisingly, sales in the pigment segment clocked the highest growth, 48%, driven by soaring titanium dioxide (TiO2) prices.
High costs of key raw materials, however, offset the revenue growth. Moreover, a stronger Swiss franc accounted for a nearly $19 million fall in Huntsman's EBITDA for the second quarter, as two of its businesses (including textiles) are Switzerland-operated. As a result, Huntsman's net income remained flat at $114 million.
But if we take a closer look, Huntsman's earnings from continuing operations actually surged from $54 million to $124 million year over year. This is more relevant than the net income figure, as last year's income included earnings of $62 million from discontinued operations.
One important point to note here is that Huntsman continues to reduce debt on its books. Its total debt-to-equity ratio, though high, has improved to 187% from 232% year over year. But with an interest coverage ratio at 3.2 times and available cash at $683 million, the situation looks under control.
The company has also announced a quarterly dividend of $0.10 per share and a share repurchase of $100 million.
Like most industry players, Huntsman has been passing on costs to customers by hiking prices.
Prior to the beginning of the second quarter, both Huntsman and Dow Chemical (NYS: DOW) raised prices for MDI products, a key product of Huntsman's largest polyurethanes segment. This was one of the important drivers for Huntsman's revenue growth in the just-concluded quarter. MDI supply is expected to remain tight, which is good news for these companies.
Chemical companies have been raking in the moola from high TiO2 prices. Continuing the aggressive price-hiking trend, DuPont (NYS: DD) and Kronos Worldwide (NYS: KRO) both have recently announced fresh price hikes. Huntsman did the same in June, which helped its pigment segment's revenue grow. This is expected to continue, as the impact of the recent price hikes will get reflected in the forthcoming quarters.
Two-thirds of Huntsman's textile business is oriented toward cotton and wool. Prices of both soared, leading to lower demand and revenues. But in the last two months, cotton prices have eased considerably. This should bode well for Huntsman in the forthcoming quarter.
Another positive factor is Huntsman's presence in the emerging markets. The company has recently acquired an Indian chemical producer. Such expansions should be positive for Huntsman.
Foolish bottom line
I don't see any strong reason for investors to dump the stock currently. Fools should take note.
Click here to add Huntsman to My Watchlist.
At the time thisarticle was published Neha Chamaria does not own shares of any of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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