3 Chemical Companies From Polaris Global Value
- By Holmes Osborne, CFA
Polaris Global Value (PGVFX) has recently come out with a quarterly newsletter that discusses some of its eclectic holdings. These three chemical companies trade on the pink sheets in the U.S. The industry appears to be out of favor, but that could change.
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The intrinsic value of PGVFX
German based Lanxess AG (LNXSF) has 91.52 million shares, the stock trades at 57.87 euros and the market cap is 5.3 billion euros. According to Morningstar, the stock trades at a price to earnings ratio of 28.75 and has a dividend yield of 1.04%. Revenues have fallen from 9.09 billion euros in 2012 to 7.9 billion euros in 2015. Free cash flow was 341 million euros for the trailing twelve months and the free cash flow yield is 6.43%. Ah ha! I can see why Polaris is a shareholder. Nice, big, fat free cash flow yield.
Lanxess is a spin-off from Bayer (BAYRY). Recently, the company announced that it was buying Philadelphia based Chemtura (CHMT) for $2.7 billion. The company is going to lever up with a lot of debt to make the transaction. Prior to the acquisition, cash stood at 1.394 billion euros, accounts receivables 1.112 billion euros, payables 683 million euros and amazingly, no debt. The company makes synthetic rubber, pigments, treatments for leather and fuel additives.
The next company is Japanese based Showa Denko (SHWDF)(SHWDY). The stock trades for 1,363 yen, there are 142.78 million shares and the market cap is 194.6 billion yen. According to Morningstar, the price to earnings ratio is 116 and dividend yield is 2.61. Like Lanxess, Showa's revenues have been flat to negative over the last few years. Free cash flow is 21.77 billion yen for a free cash flow yield of 11.15%. Again, I see a trend--chemical companies with huge free cash flow.
Showa manufactures gases, electronic chemicals, olefins, polymers, basic chemicals like ammonia, aluminum, chemicals for batteries and many other products. It was recently announced that Showa will buy out Lyondell's stake of a polypropylene joint venture. In June, the company also announced that it is building a plant in the U.S. for the production of gases to be used in microchip plants.
The last company is Franco-Belgian Solvay SA (SVYSF). The stock trades at 109.3 euros, there are 84.3 million shares and the market cap is 9.2 billion euros. Not a shrinking violet in size. According to Morningstar, the price to earnings ratio is 22 and dividend yield is 3.17%. Like our other two chemical companies, sales have barely budged, in this case slightly positive. Free cash flow is 698 million euros, for a free cash flow yield of 7.6%. We have a pattern here.
Solvay manufactures amines, barium, chlorine, lithium, flavors, fragrances, polymers, rare earth compounds, wood chemicals and specialty chemicals. Solvay is building a plant in Germany to produce lightweight parts for aircraft. Again, another trend--building plants to meet demand.
Many of these companies are recipients of cheap, natural gas. Of course, this is due to fracking. Of course, the risk is a slowdown in manufacturing. Like so many things in the economy, sales and earnings have been on a roll since the 2008/2009 market crash. At some point, this economy has to slow. In Polaris' newsletter, management spoke of Lanxess' purchase of Chemtura and that Showa has increased earnings estimates on higher ethylene spreads. I must admit, I'm not an expert in the chemicals industry. There is quite a bit to know.
With oil and commodities down, it's probably a good time to be in chemicals. If your price can remain the same and costs decrease, that is a no-brainer. So Polaris has picked three global chemical companies with huge free cash flow. With that cash flow, the three can: pay down debt, buy back shares, acquire more companies, increase the dividend or let the cash pile up in the bank account. I like how Polaris is scouring the globe for these ideas. There are only a handful of chemical companies in the U.S., and the ones that I can think of are mega-caps.
Disclosure: We do not own shares.
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This article first appeared on GuruFocus.
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The intrinsic value of PGVFX
