2023-11-26 04:28:13 ET
Summary
- Huntsman Corporation's third-quarter results showed weak demand and declining revenues across all business segments.
- The company is facing challenges from a global slowdown and high competition, leading to lower prices and sales volume.
- With a high valuation and no significant upside potential, it is recommended to sell HUN stock.
Investment Thesis
Huntsman Corporation ( HUN ) is an American chemical producer headquartered in The Woodlands, Texas. In this thesis, I will analyze its third-quarter results and its future growth prospects. I will also be analyzing its valuation at the current price level and the upside potential in the stock price. HUN is facing weak demand across business segments, and a global slowdown is affecting its revenues across geographies. I believe the company will continue to face these headwinds in the near future, and hence, I am assigning a sell rating for HUN.
Company Overview
Huntsman Corporation, founded in 1970, is now a global chemical company that specializes in the manufacturing and marketing of a wide range of chemical products for various industries. Its business can be segregated into three segments: Polyurethanes, Performance Products, and Advanced Materials. Polyurethane chemicals are used in applications ranging from insulation materials to automotive components. The performance products segment deals with specialty chemicals and additives for applications in industries like adhesives, aerospace, and textiles. Advanced materials include epoxy resins, specialty coatings, and structural adhesives.
Q3 FY23 Results
HUN posted weak third-quarter results, missing revenue and EPS estimates by a significant margin. The revenues saw a decline across all three business segments due to weak demand from the construction and automobile industries. But the weak demand isn't the only problem that it faces; high competition has compelled it to sell its products at lower prices. Weak demand has resulted in a decline in the sales volume, and lower prices have made the situation even worse. I believe the company is hit by a double whammy, a recovery from which doesn't seem likely in the short term.
It reported total revenue of $1.5 billion , a significant decline of 25% compared to $2.01 billion in the same quarter last year. Performance products proved to be the worst performer, with a 36% fall in revenues from $434 million to $277 million y-o-y. The Polyurethanes segment witnessed a fall in revenues of 23% from $1257 million to $967 million, followed by the Advanced Materials revenues of $268 million, down 18% compared to $328 million in the corresponding quarter last year. As per my analysis, the slowdown in construction activities in the United States resulted in weak demand for polyurethane products. 70% of the polyurethane revenue comes from the construction industry, with both commercial and residential construction contributing to revenues at 40% and 60%, respectively. What I would like to emphasize is that 75% of this revenue comes directly from the new construction activities. This reflects that unless the construction industry picks up the pace, the demand will remain subdued. The automobile industry is also a big contributor to its revenues, but the demand there also remains depressed despite the growing automobile industry. I believe the major reason behind this fall in demand from the automobile industry is competitive pricing. The increase in chemical imports from China has resulted in a fall in product prices. This is not only affecting its margins but also its volumes. HUN reported a diluted EPS of nil compared to a diluted EPS of $0.5 in Q3 FY22.
Now, let us have a look at the company’s balance sheet. As of September 30, 2023, it reported cash and cash equivalent of $496 million against the long-term debt of $1493 million . The company’s net leverage ratio deteriorated from 0.7x to 2.2x y-o-y. I believe HUN should keep the leverage ratio below 2x to avoid being overleveraged, especially in this challenging economic environment where the company might need to raise funds to boost its revenue growth.
Overall, the results failed to impress me on multiple parameters. It expects the adjusted effective tax rates to be in the range of 22%-24% in the long term, compared to the current quarter’s tax rate of 37%. This will help the company in terms of profitability; however, management has not provided any timeline for the expected implementation of this improved tax rate. HUN has provided Q4 FY24 adjusted EBITDA guidance in the range of $65-$90 million. If we compare this to Q3 FY23 adjusted EBITDA of $136 million, we will realize that the situation is going to worsen. I believe the weak demand and pricing pressure will be sustained till the end of FY24. I would recommend investors to wait for a turnaround in the construction space, but till then, they should stay away from HUN.
Valuation
HUN is currently trading at a share price of $25.4, a YTD decline of 10%. It has a market cap of $4.25 billion. It is trading at a forward Non-GAAP P/E multiple of 46x compared to the sector median of 14.6x. This clearly reflects the fact that it is highly overvalued, and I do not see any reason why it should trade at such a premium. There is no significant upside potential in the stock price, and it should not trade at such a premium with consistently worsening financial performance.
Conclusion
The muted product demand, coupled with lower sales prices, has resulted in declining revenue. The company expects to face headwinds throughout FY23, which is visible in its guidance. It is trading at a significantly high valuation, which I think is not sustainable with deteriorating financial performance. Considering all these factors, I assign a sell recommendation for HUN.
For further details see:
Huntsman Corporation: Overvalued And Weak Financial Performance