Citi assesses the Chemical industry as it faces sky-rocketing feedstock costs. Citi sees a tough Q2, but is still bullish on Ecolab (ECL), Nalco (NLC), Air Products & Chemicals (APD) and Praxair (PX):
Q2 Pain as $130 Oil Works Its Way Downstream:
We have a near-term negative view as rising feedstock costs work their way down the chemical chain. Quite simply, downstream prices haven’t caught up with the Upstream. Our Analysis Shows “2nd derivatives” of oil like PE, acrylics, epoxies, and PS have risen only 20%-40% in the same time that feedstocks have risen 105%.
Upstream Players Generally Have Pricing Power:
Large upstream Producers of 1st and 2nd Derivatives are generally larger and more consolidated than the downstream players they sell to.
Lowering 2Q & 3Q Estimates:
We are lowering 2Q & 3Q estimates on specialty chemical names such as ROH [Rohm and Haas Company], SHW [Sherwin-Williams Company], LZ [Lubrizol], and VAL [Valspar]… we are raising our numbers on PPG due to strength in caustic, although coatings margins remain challenged.
Our Investment Theme:
We expect investors to gravitate towards defensive names in consolidated industries. Defensives such as ECL [Ecolab] (Hygiene), NLC [Nalco] (Water Treatment), and APD [Air Products & Chemicals] & PX [Praxair] (Industrial Gases) generate steady earnings and cash flows throughout the cycle, and maintain good pricing power by circling the customer. Buy ALB [Albemarle], NLC, ECL, APD, PX, CE [Celanese], EMN [Eastman Chemical].