business insights
TRANSCRIPT
b u s i n e s s i n s i g h t s
Chemical stocks were strong in past two months
Securities analysts and investors have finally discovered that there may be earnings potential
in chemical companies. Since the beginning of the second quarter, chemical stocks by far have outpaced the Dow Jones industrial average.
Over the past two months, C&EN's new stock market index of 25 chemical companies has risen 21.4%, whereas the Dow Jones has increased only 7.4%. After suffering for about a year, chemical stocks, although having none of the cache of computer and Internet stocks, clearly are a place to be.
The companies that make up the index are Air Products & Chemi-cals, Albemarle, Arch Chemicals, Cabot, Crompton & Knowles, Cytec Industries, Dow Chemical, DuPont, Eastman Chemical, Ethyl, FMC, H. B. Fuller, W.R Grace, Great Lakes Chemical, Hercules, IMC Global, International Specialty Chemicals, Lubrizol, Nal-co, Praxair, Rohm and Haas, Solutia, Stepan, Union Carbide, and Witco.
The index still has a long way to go to reach its high of 204.15 set in early 1998, but it is climbing. Among the reasons cited by analysts are a possible end to the Asian economic crisis, which could lead to increased earnings from a better export market and from better results from overseas operations; a continuing strong domestic economy; improving prices in some sectors, and the idea that the chemical economy is near bottom and soon will have nowhere to go but up.
Leslie Ravitz, chemical analyst with Morgan Stanley Dean Witter, wrote last month: "Would you believe shortages [in North America] again? A lack of inventory at the customer, unscheduled plant downtime, and rising hydrocarbon values have resulted in a customer stampede for ethylene and polyethylene. But the industry is not capable of supplying this rush of orders, so prices are going up." Ravitz sees tight operating conditions for 1999 in North America and expects prices to rise sharply.
Chemical analysts at Merrill Lynch are saying of chemical stocks: "We are very selective and cautious near term. At the same time, we are more bullish on the long-term prospects for the overall industry and very comfortable with the companies that we are recommending." And the brokerage house is recommending seven of the 25 companies that appear on C&EN's list.
But no matter what the chemical analysts are recommending, it appears that interest in chemical stocks is spreading to other industry stocks as well. This is only natural, because the market often drives itself until some defining moment
Chemical stocks are beginning to recover
or event creates a change in investor attitude. Thus, a bull market—as well as a bear market—will feed upon itself.
Also, there is a theory that the stock market is about a six-month leading indicator of earnings. If this is the case, then earnings for the entire chemical industry likely will show a strong upturn in about the fourth quarter of 1999.
At any rate, the run-up in chemical company stock prices has been pervasive since the first of April, with individual stock prices for C&EN's sample greatly beating the Dow Jones by rising anywhere from 10% to more than 40%.
On the top side was Arch Chemicals, the performance chemical spin-off from Olin, rising 41.1% to $23 per share. This was followed by W.R Grace, up 37.2% to
$177/ie; Hercules, up 37.1% to $34%; Praxair, up 35.2% to $48n/i6; Solutia, up 34.3% to $22%; and FMC, up 32.5% to $66Vi6. And in case anyone thinks that large commodity chemical companies didn't take part, Dow Chemical's stock price was up 29.4% to $121%.
On the lower end of the scale was Albemarle—the only company on the list that did not beat the Dow Jones— up 6.3% to $223/ie; IMC Global with 8.1% growth to $21n/i6; Stepan, up 10.0% to $243/4; Crompton & Knowles, up 10.4% to $1515/ie; and DuPont, up 11.1% to $65^6.
A new index This column marks the first use of
C&EN's new stock index. We thought that with today's volatile market, it was time for a change. The old C&EN index, which dates from 1954, was made
up of seven of the largest U.S. chemical companies. And it was based on stock market value.
This had a number of disadvantages, chief among them the narrow range of companies and the corresponding aspect that it was dominated by two companies—DuPont and Dow Chemical. At current prices, the market capitalization of these two companies makes up some 78%—57% for DuPont and 21% for Dow—of the total market value of the seven firms and so they had an inordinate influence on the index.
Thus, we decided on a new approach—an index based on stock price rather than capitalization of a broader sample of 25 companies. The disadvantage of
restyling the index is that we gave up 45 years of history, but we felt that this was far outweighed by two advantages: The new index, which uses a base year of 1992, will more accurately reflect stock price movement among a broader range of companies; and it will not be dominated by one or two large capitalization firms. At present, for instance, Dow Chemical—with the highest stock price—accounts for just a little more than 13% of the index.
We also hope that the development of this new—and we think improved— index will spur us to make greater use of it in the fiiture to inform readers on a regular basis about what is happening in the stock market.
William Storck
16 JUNE 7,1999 C&EN
Note: C&EN stock index based on average stock price of 25 major chemical companies.