Are The Positives Already Priced In For Huntsman At $30 Levels?

After a solid 2x rise since the March 23 levels of last year, at the current price of around $29 per share we believe Huntsman Corporation stock (NYSE: HUN), a chemicals company best known for its polyurethanes, has reached its near-term potential. HUN stock has rallied from $13 to $29, outperforming the S&P which moved 70% over the same period, with the resumption of economic activities as lockdowns are gradually lifted and vaccines are being approved in multiple countries. The outperformance of Huntsman can be attributed to better than estimated Q2 and Q3 earnings, clubbed with an expected pickup in demand for its Polyurethanes segment after recent acquisitions including that of Demilec and Icynene-Lapolla. Both these acquisitions are expected to bode well for Huntsman making it the world’s largest supplier of spray foam products. HUN stock is also up 48% from levels of $19 seen in early 2019, two years ago.

The 48% rise of the last 2 years can primarily be attributed to changes in the company’s P/S (price-to-sales) multiple. Looking at fundamentals, total revenues were actually down from $7.6 billion in 2018 to $6.8 billion in 2019 and $6.0 billion over the last twelve months. The company saw a 3.7% decline in total shares outstanding, resulting in a 7% decline in revenue per share to $29.75 in 2019, compared to $32.04 in 2018. Despite the decline in RPS, the company’s P/S ratio expanded. We believe the stock has rallied meaningfully and it is likely to see downside after the recent uptick. Our dashboard, ‘Buy Or Fear Huntsman Stock’, has the underlying numbers.

Huntsman’s P/S multiple changed from 0.6x in 2018 to 0.8x in 2019. Now that the company’s P/S has expanded to 1.0x, there is a potential downside risk when the current P/S is compared to levels seen in the past, P/S of 0.8x and lower over the recent years.

So what’s the likely trigger and timing for downside?

Huntsman has been focused on investing in its downstream business and it has recently announced restructuring of its Polyurethanes segment in order to achieve higher efficiency. The company also introduced a cost optimization program in 2020 aimed at achieving cost synergies of over $100 million by the end of the current year. Additionally, Huntsman has made multiple acquisitions over the past year including that of Demilec, Icynene-Lapolla and CVS Thermoset Specialities, which are expected to aid its polyurethanes and advanced materials business.

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However, the company’s business has also been impacted by the current pandemic and its sales were down 15% to $4.3 billion for the first nine months of 2020 compared to $5.1 billion over the prior year period. While the company is expected to benefit from the recent acquisitions, restructuring, and cost optimization initiatives, much of this is likely priced in the current stock price of $29. In reality, full year 2020 sales are estimated to be down 11% to $6.0 billion and its earnings are estimated to be down 40% to $0.92 on a per share and adjusted basis. Given that the stock has rallied despite falling revenues, the company’s P/S ratio has expanded meaningfully. Even if were to look at forward revenues, going by consensus revenue estimate of $6.8 billion in 2021, HUN stock is trading at 0.9x its RPS of $31.00 for 2021. This compares with levels of under 0.6x seen in 2018 and 0.8x as recent as late 2019, implying that the stock is vulnerable to downside risk.

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