Small Cap Stocks in the Chemical Industry Adjust

The Chemical Industry in the Basic Materials Sector has been hammered hard by the global recession. Even major players like Dow Chemicals (DOW) have been hit hard. Daily watchers of the sector point to the overcapacity of polyethylene (PE), a basic thermoplastic that is one of the most widely produced and traded petrochemicals in the world.

By 2010, forecasts predict an excess capacity in the global PE market to reach 17 million tons, or 15 percent of total world demand. In comparison, previous cyclical downturns in the PE market in 2002 and 1993 both saw a surplus of seven percent of demand.

The consequences of those seven percent drops and the expected 15 percent drop will most likely be realized in plant closures in North America, Europe, Japan, and Korea while China and some Middle Eastern countries build plants to gain greater independence.

DJ US Chemicals Index

A $38 stock on the Pink Sheets -it's an American Depository Receipt- BASF SE ADS (BASFY) dropped 68% in first quarter net income. The Company said it will continue slashing costs to adjust and stay viable. Net income at BASF fell $499M and its sales dropped 23%.

BASF Chairman Jurgen Hambrecht made note that the Company was one of the first companies in this sector to adapt its capacities to the dramatic slump in demand and reduce costs on all levels. Among its main divisions, BASF said the plastics business reported a loss after a drastic decline in sales and narrower profit margins in its performance-polymers business.

In another dramatic downturn in the sector, Nova Chemicals (NCX) trading on the NYSE in the $5 range is being taken over by Abu Dhabi's International Petroleum Investment with shareholder approval. Nova's revenues had fallen 57% and its Q1 shares lost $1.31. The Company EPS of a year ago was $1.48. A very dramatic swing.

So are there any hopeful stories in this sector that could present a buyside opportunity as the sector gets pummeled while it re-tools? It think so.

I like Small Cap Huntsman Inc., (HUN) http://www.huntsman.com/ on the NYSE trading at $4. I like this Company for a sentimental reason in part; the Chairman is its founder Jon M. Huntsman and his son Peter Huntsman is the CEO. There is something to be said for family-led businesses. 

Based in Salt Lake City, Utah and founded in 1970, Huntsman employees 12, 600 people and operates in four segments: Polyurethanes, Materials and Effects, Performance Products, and Pigments. The company's products are used in various applications, including adhesives, aerospace, automotive, construction products, durable and non-durable consumer products, electronics, medical, packaging, paints and coatings, power generation, refining, synthetic fiber, textile chemicals, and dye industries.

Less sentimental, I like the fact that that at $4, this stock is trading near its 52-week low of $2.03 and far, far away from its 52-week high of $23.95 last May, 2008. With a market cap of $1.44B, Huntsman is right at its 50-day and 200-day moving average pays a trailing annual dividend yield of 6.60 percent. It's shares out and float are near-parity and its trailing twelve month revenue is $9.37B with trailing twelve month revenues per share of $40.09.

More expensive at $38 on the NYSE but still in the Small Cap range is Eastman Chemical (EMN) http://www.eastman.com/ which also pays a dividend: $0.44 per share announced March 31, 2009. This Company has a track record as well, being founded in 1920.

Based in Kingsport, Tennessee with 10,500 employees, Eastman operates in five segments: Coatings, Adhesives, Specialty Polymers, Inks and Fibers making chemicals for such diverse applications as agrochemical, automotive, beverages, nutrition, pharmaceuticals, medical devices, toys, photographic and imaging, household products, polymers, textiles, and industrials.

While it's been drastically turned over in year over year figures, Eastman held its own in Q1 ended March 31, 2009. Even though its revenues dropped to $1,129,000 from $1,346,000 of Q4 ended December 31, 2008, the Company posted a higher gross profit quarter over quarter as its costs of revenues dropped. Belt tightening. Management is making the right moves to adjust to the Sector's slump.   

Eastman has a market cap of $2.84B and at $38, is well below its 52-week high of $78.29 last May. At $38, it's above both its 50-day and 200-day moving average. It shares out versus float ratio is near-parity and Eastman's trailing twelve month revenue is $6.13B with trailing twelve month revenues per share of $83.06.

I also see hope for this sector in another Small Cap stock; Celanese Corp., (CE) http://www.celanese.com/ trading on the NYSE at $19. Celanese, which manufactures chemicals used in such products as paints, textiles and food ingredients, has seen its shares nearly triple since the beginning of March, rising from $7.52 to trading in the $20 range. An investment researcher recently noted that Celanese shares were oversold at the early March price, but are now fairly valued.

On that hopeful side, the Dallas-based company has doubled its cost reduction program, and Celanese plans to double its Nanjing, China production capacity for acetic acid

And adding more hope, David Weidman, who serves as Celanese's chairman, in an interview with The Associated Press on Monday said the Company's first quarter was better than the fourth quarter was, and the second quarter is shaping up to be better than the first quarter. Well, that certainly is in the right direction.

Celanese has a market cap of $2.73B and is well off its 52-week high of $50.99 last June, 2008. It's currently above its 50-day and 200-day moving average. Its shares out and float are near-parity and Celanese's trailing twelve month revenue is $6.12B with its trailing twelve month revenues per share at $41.87.