Is This Chemical Stock's Run About to Stall?
Shares of Huntsman have tacked on a solid 33% since July, but whether the stock will continue its run will be clear next week when the company reports its third-quarter numbers. Recent news from industry peers haven't been too great, with DuPont's chemical business delivering a lackluster third quarter and Dow Chemical missing Street estimates on lower sales volumes across key businesses.
If Huntsman doesn't deliver, the stock's run could stall. So it makes sense for an investor to know what to expect from Huntsman's upcoming earnings report to avoid nasty surprises or shocks.
Question you should ask
Interestingly, analysts expect Huntsman's third-quarter earnings per share to drop 23% year over year despite 3% growth on the top line. That means high costs are clearly putting tremendous pressure on Huntsman. What are the costs that are eating into the company's margins? Is it a short-term headwind or a long-run pain? These are just some of the critical questions that investors should seek answers to in Huntsman's upcoming earnings report.
The chink in Huntsman's armor
Judging by DuPont's just-released quarterly report, Huntsman's pigments business will likely drag the company's profits down in the third quarter. While sales from DuPont's performance chemicals division fell 1% year over year, operating profit from the division slumped 39%, reflecting the substantial impact of high titanium ore cost.
Huntsman investors can take heart because 60% of the company's titanium dioxide, or TiO2, is produced using the inexpensive sulfate ore. So Huntsman's pigments division may not be hit as badly as DuPont's performance chemicals business. But, there's another problem. Unlike DuPont, which largely sells to customers in North America, more than half of Huntsman's TiO2 sales come from Europe. Since the region isn't in the best shape right now, expect a dismal third quarter from Huntsman's pigments business.
Key business in trouble?
Margins for Huntsman's polyurethanes division may also be hit in the third quarter because of high feedstock costs. Dow Chemical's performance materials business, which primarily includes polyurethanes, was among the weakest performers in the third quarter. Dow Chemical hinted at weaker industry conditions during the quarter, which was evident in the 4% fall in sales volumes for the division. That bodes ill for Huntsman since it derives more than 40% of its revenue from its polyurethanes division. Worse yet, despite sales falling only 3% year over year, Dow Chemical reported a sharp 36% decline in operating profit from the division because of high input costs.
If Huntsman also reports lower volume and higher costs for its polyurethanes business in the third quarter, its margins could get squeezed going forward. With Dow Chemical announcing fresh cost-reduction initiatives for its polyurethanes business to save $100 million in the near future, Huntsman investors should keep a close eye on how their company plans to reduce costs.
The silver lining
Equally important will be the performances of Huntsman's textile effects and advance materials businesses in the third quarter. The company has worked hard on the two ailing units over the past year, and the results are showing up. Operating earnings from both the businesses improved substantially during the second quarter. An encore in Q3 would be good news for Huntsman investors since the two divisions combined account for nearly 20% of the company's top line.
The Foolish bottom line
While the market isn't expecting a great quarter from Huntsman, the focus will be less on numbers and more on the updates management gives on the recently announced plan to spin off its TiO2 business. Though a critical move, there are several reasons why I think the company may not have made the best decision.
Moreover, as I write this, news of DuPont announcing a similar move for its TiO2 business is pouring in. Naturally, analysts and investors should have several questions for Huntsman, especially about how the company plans to take on the world's largest TiO2 producer. Watch this space to get an insight into Huntsman's numbers, growth catalysts, challenges, and plans for the future.
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The article Is This Chemical Stock's Run About to Stall? originally appeared on Fool.com.Fool contributor Neha Chamaria has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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