Innospec Inc (NASDAQ:IOSP), a US$1.8b small-cap, is a chemicals company operating in an industry which is sensitive to changes in the business cycle, as it supplies materials for construction activities. Basic material analysts are forecasting for the entire industry, a strong double-digit growth of 23% in the upcoming year , and a whopping growth of 90% over the next couple of years. This rate is larger than the growth rate of the US stock market as a whole. Today, I will analyse the industry outlook, as well as evaluate whether Innospec is lagging or leading in the industry.
What’s the catalyst for Innospec’s sector growth?
The sector seems to be mature in terms of its industry life cycle, with vastly competitive companies and inevitable consolidation. In the past year, the industry delivered growth in the thirties, beating the US market growth of 18%. Innospec lags the pack with its negative growth rate of -19% over the past year, which indicates the company has been growing at a slower pace than its chemicals peers. However, the future seems brighter, as analysts expect an industry-beating growth rate of 60% in the upcoming year. This future growth may make Innospec a more expensive stock relative to its peers.
Is Innospec and the sector relatively cheap?
The chemicals industry is trading at a PE ratio of 21.87x, relatively similar to the rest of the US stock market PE of 20.06x. This illustrates a fairly valued sector relative to the rest of the market, indicating low mispricing opportunities. However, the industry returned a higher 17% compared to the market’s 10%, potentially illustrative of past tailwinds. On the stock-level, Innospec is trading at a higher PE ratio of 28.25x, making it more expensive than the average chemicals stock. In terms of returns, Innospec generated 7.6% in the past year, which is 9.4% below the chemicals sector.
Innospec’s industry-beating future is a positive for shareholders, indicating they’ve backed a fast-growing horse. However, this higher growth prospect is also reflected in the company’s price, suggested by its higher PE ratio relative to its peers. If Innospec has been on your watchlist for a while, now may not be the best time to enter into the stock since it is trading at a higher valuation compared to other chemicals companies. However, before you make a decision on the stock, I suggest you look at Innospec’s fundamentals in order to build a holistic investment thesis.
- Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Historical Track Record: What has IOSP’s performance been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Innospec? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.