Wall Street Unveils Top Picks

10 January 2005 00:01  [Source: ICB Americas]

Dow, Nova and Cytec are favorites. Joseph Chang reports.

With the clarity of its crystal ball more or less confirmed by last year’s good calls, Wall Street is ready to unveil its top stock picks for 2005. Peering into the future, the analysts see a bright investment landscape with gaining pricing power, volume strength and moderating energy prices.

CS First Boston analyst Bill Young is highlighting Dow Chemical Company among his six outperform-rated stocks as the best way to play the cycle. Last year, shares of Dow rose from about $41.50 to $49.50.

“In the last three chemical cycles covering 30 years, the earliest the commodity firms have discounted the peak has been one year ahead of the earnings zenith,” says the analyst. “Pricing and margin upside will remain primarily in the hands of the commodity players. Earnings are not likely to peak for such companies until year-end 2006 at the earliest, implying another year of outperformance.”

Mr. Young estimates Dow’s earnings per share (EPS) will rise from $2.45 in 2004 to $3.90 in 2005, and has a price target of $62 on the stock.

Deutsche Bank analyst David Begleiter is also selecting Dow Chemical as his top pick.

“We’re looking for a very strong commodity chemical cycle, particularly in the first half of 2005,” he says. “The stock has done quite well in 2004, but the cycle is just now really gaining momentum. Supply-demand fundamentals are tight, price increases have been pushed through, and feedstock costs are moderating.”

Mr. Begleiter expects Dow’s profits to ramp up from $2.35 in 2004 to $4.35 in 2005 and has a price target of $60 on the stock.

Prudential Financial analyst Andrew Rosenfeld also highlights Dow Chemical as his top pick, after posting a 76 percent gain with his 2004 pick, Nova Chemicals Corp.

“Expanding margins should continue to drive significant earnings growth as we head into a commodity chemical cycle peak,” says the analyst. “Dow’s realigned cost structure should give the company significant operating leverage to the upcoming peak.”

Mr. Rosenfeld expects Dow’s earnings to jump from $2.65 in 2004 to $4.25 in 2005, and has a price target of $61 on the stock.

Goldman Sachs analyst Robert Koort’s top pick for 2005 is DuPont, a company that has lagged in stock performance in 2004, rising from around $46 to $49.

“We believe DuPont is on course for much improved financial performance following the conclusion of distracting M&A activity in the past several years and the emergence from a challenging industrial environment that together conspired to erode investor confidence and leave DuPont shareholders in the wake of better performance achieved by other chemical stocks,” says Mr. Koort.

Mr. Koort sees an earnings recovery, driven by increased demand, better pricing and cost-cutting. The analyst expects DuPont’s EPS to rise from $2.35 in 2004 to $2.80 in 2005.

Banc of America Securities analyst Kevin McCarthy, who had the best pick in 2004 with Monsanto Company (+93 percent), is selecting Lyondell Chemical Company as his top pick.

“Lyondell is our favorite way to play the cycle, which we expect to strengthen through 2006 to 2007,” he says. “We like the leverage to ethylene as well as the capability to crack heavier feedstocks, which will give Lyondell an advantaged cost position.”

Mr. McCarthy expects Lyondell’s EPS to rise from 50 cents in 2004 to $2.20 in 2005, and has a price target of $33 on the stock. Lyondell trades at around $28.

Fulcrum Global Partners analyst Frank Mitsch is touting Nova Chemicals as his top pick.

“Nova has the highest leverage to commodity petrochemicals, which will continue to fly after emerging in 2004 from a deep slumber,” says Mr. Mitsch. “Our estimate for 2005 is looking more conservative, and consensus estimates will likely move upward as well.”

The analyst expects Nova’s EPS to jump from $1.70 in 2004 to $4.50 in 2005, and has a price target of $56 on the stock. Nova trades at around $47.

Jay Harris, an analyst at Goldsmith & Harris, also taps Nova Chemicals as his top pick.

“Through most of 2004, the company has had pricing power in commodity chemicals, and I think that will remain so in 2005 and 2006,” says Mr. Harris. “The earnings they generate will be surprisingly high. You may be looking at EPS of between $10 to $15—possibly in 2006.”

The analyst expects Nova’s EPS to rise from $1.82 in 2004 to $5.50 in 2005, and has a price target in the mid-$60s.

Deutsche Bank analyst Laurence Alexander highlights Cytec Industries Inc. as his top pick.

“Once the UCB deal closes and the company has reassured investors on raw material exposure and that the UCB business remains on track in terms of expected EBITDA generation in 2005, the stock could move into the mid- to high-$50s,” he says. “Clearly the deal is very accretive.”

Mr. Alexander expects Cytec’s EPS to rise from $2.86 in 2004 to $3.50 in 2005, and has a price target of $58 on the stock.

CS First Boston analyst John McNulty also taps Cytec Industries as his top pick, expecting EPS to rise from $2.87 to $3.71.

“The Street may be overly conservative on Cytec’s earnings power, and so there is risk on the upside in 2005,” says Mr. McNulty. “Given this potential upside and Cytec’s cheap valuation, we believe there is upside to our $52 price target.”

Lehman Brothers analyst Sergey Vasnetsov’s top pick is Air Products, which provides “both earnings stability from the industrial gases side and sensitivity to the cycle on the chemicals side.”

The analyst sees Air Products’ EPS rising from $2.64 in fiscal 2004 (ended September) to $3.13 in fiscal 2005.

Buckingham Research analyst John Roberts’ top pick is Cabot Microelectronics Corp.

“We believe the electronic materials area will have unit growth higher than most chemical sectors, and prices for electronic materials are more stable than end market prices,” says the analyst. “Cabot Micro, which underperformed the strong gains in the more economically sensitive chemical stocks last year, is poised to more than catch up in 2005.”

Mr. Roberts sees Cabot Micro earning $2.25 per share in fiscal 2005 (ended September) after earning $1.87 in fiscal 2004. His price target on the stock is $47 versus today’s price of around $40.

Michael Sison, analyst at KeyBanc Capital Markets, a division of McDonald Investments, is offering up Airgas Inc. as his top pick.

“Airgas has a unique business model in the specialty chemical sector capable of generating attractive earnings growth of 10 to 15 percent over the next few years,” says the analyst. He says Airgas can reach $3 billion in sales by fiscal 2008 with earnings power of $2 per share.

Mr. Sison expects Airgas to earn $1.25 per share in fiscal 2005 (ended March) and $1.50 in fiscal 2006, and has a price target of $35 on the stock. Airgas trades at around $27.

Chris Kapsch, analyst at Black Diamond Research, taps OM Group Inc. as his favorite stock.

“OM Group’s valuation remains overly penalized, in our view, from legacy management missteps, as well as a tedious ongoing financial restatement process,” says the analyst. “Restatement concerns should be diminished by the end of January. Meanwhile, we are particularly enamored with favorable cobalt industry fundamentals. With cobalt metal prices the single most important leverage variable for OM Group, we think the stock will benefit as 2005 progresses.”

Mr. Kapsch expects OM Group’s EPS to rise from $3.55 in 2004 to $3.70 in 2005, and has a price target of $45 to $48 on the stock. OM Group trades at around $32.

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