Top Rated Stocks In Specialty Chemical Sector Up 34% Versus S And P At 13%; Discover The Picks In The KeyBanc Capital Market Coverage Universe
March 1, 2011 - The Wall Street Transcript has just published Alternative Energy Report offering a timely review of the Energy sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Douglas Chudy, CFA, is an Equity Research Analyst with KeyBanc Capital Markets, Inc. His research coverage is focused on the specialty chemicals sector. Before his promotion to Senior Analyst, he worked as a Research Associate covering the specialty chemicals sector. Prior to joining KBCM in December 2006, he was an Assistant Vice President in the Media/Telecom Finance Group at SMBC and previously an Analyst in the Healthcare Group at JPMorgan. Mr. Chudy earned a BBA degree from Ohio University. He holds the Chartered Financial Analyst designation, as well as Series 7, 63 and 87 industry licenses. Mr. Chudy is a member of CFA Institute and the CFA Society of Cleveland.
TWST: Please start with a brief overview of your coverage areas, including some of the specific names you follow.
Mr. Chudy: I cover the specialty chemical sector with a focus more on small to mid-cap stocks. The specialty chemical industry is fairly diverse here. Companies typically upgrade chemical raw materials to form higher value products that go into all sorts of industries and end markets, from building and construction, automotive, agricultural to general industrial markets. My coverage universe includes diversified specialty chemical stocks, such as Solutia (SOA) and FMC Corp. (FMC); paints and coatings companies, such as Sherwin-Williams (SHW) and PPG Industries (PPG); and some names that play into the agro-fertilizer space, such as Intrepid Potash (IPI) and Compass Minerals (CMP).
TWST: In a recent industry note, you wrote that specialty chemical companies tend to outperform in early to midcycle recovery. What are the characteristics that contribute to that outperformance trend and how are they currently playing out among the companies in your coverage?
Mr. Chudy: For specialty chemical stocks, volume is typically the strongest earnings lever. The sector had a very strong performance in last year. Our coverage universe was up about 34% on average versus the S And P, which was up about 13%. Specialty chemical stocks do tend to perform well in early to midcycle recoveries. Really, this is as demand ramps back up and it drives attractive volume growth, which bolsters earnings. So this certainly was the case last year, and considering some substantial cost reductions taken during the economic downturn, we feel the sector should have good earnings leverage here as volumes continue to recover. So volumes would definitely be the key lever for specialty chemical names.
TWST: What are your top-rated stocks today and why?
Mr. Chudy: My top pick for 2011 is Solutia. I continue to see pretty good leverage here to a global automotive recovery, and they also have good leverage to the eventual cyclical rebound in global construction markets. Earnings growth for Solutia should challenge most anyone in the sector. I'm looking for EPS growth north of 45% in 2011. Solutia has very strong market positions and good pricing power, which makes me comfortable on the raw material side and top-tier margins, yet still trades at a discount to what we consider other top-tier high-quality industry peers. Solutia is currently trading near 24, but we see some pretty attractive upside here to 32 over the next 12 months. So Solutia would be my top pick for the year.
TWST: Are there any other particularly interesting stories you would tell investors to keep an eye on?
Mr. Chudy: I also like FMC Corporation. I think this one is on track for another solid year of earnings growth, does have some good leverage. Soda ash pricing could be a potential upside earnings lever. With FMC, it tends to be a bit more of a defensive name, so if we see any sort of market pull back, we think that this one should hold up fairly well. Primary end markets include less-cyclical food, agricultural and pharmaceutical markets. So FMC is another quality name where we see pretty attractive upside potential north of 25% for 2011.
TWST: Is there anything that I didn't touch on or include in my questions that you think is important for readers to know about the space?
Mr. Chudy: I think we more or less hit on the major issues. Once again, we are generally positive on the sector, noting raw materials are a bit of a wildcard here, but over time we feel pretty comfortable in the sector's ability to pass through pricing. And I think the sector should outperform relative to the market over the next 12 months or so.
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