INSIGHT: Deeper cuts needed in chems estimates

31 October 2008 17:10  [Source: ICIS news]

By Joseph Chang

 

NEW YORK (ICIS news)--You would think that Wall Street earnings estimates for next year would be sharply lower than for 2008 with the global financial crisis wreaking havoc and causing ripple effects upon world economies. Think again.

 

While analysts have indeed taken the axe to 2009 earnings per share (EPS) estimates following this year's third-quarter results, the cuts have not been deep enough.

 

The table below of profit estimates for 2008 and 2009 shows expected declines ranging from -5% for DuPont to -23% for NOVA Chemicals in the major and diversified group section.

 

Most analysts do in fact expect lower earnings from the large chemical companies. Fair enough. Whether 2009 estimates should reflect greater declines can be argued.

 

But a second look at the 2009 profit estimates of the specialty chemical universe shows they expect EPS gains across the board!

 

Nalco is expected to post a 23% gain in 2009 EPS, to $1.41, while FMC is expected to increase EPS by 20%, to $5.24, and Arch Chemical by 19%, to $2.60. Wall Street forecasts double-digit EPS gains for most others.

 

“To see 10-20% expected EPS gains for specialties is unbelievable,” said one source in the financial community.

 

“The chemical industry is much more volatile than the earnings numbers are reflecting,” he added.

 

Specialty chemicals are still viewed as less cyclical than commodity chemicals, even after the downturn in the late 1990s through the early 2000s saw stunning, unprecedented declines in specialty chemical earnings and stock prices.

 

Specialty chemical to aerospace materials producer and Wall Street darling Cytec Industries saw its stock price fall from nearly $56 to less than $16 in 1998. From June 1999 to September 2001, Hercules’ stock price fell from more than $39, to just above $8.

 

The specialties as non-cyclical businesses myth had been exposed and stock market valuations between commodities and specialties converged in the following years.

 

And while specialties may be somewhat less vulnerable to a global economic downturn than their commodity counterparts, they are nowhere close to immune.

 

Investors aren’t buying the optimistic earnings estimates - for either group. Price/earnings (P/E) multiples based on 2009 EPS estimates are mostly in the single digits.

 

Celanese trades at around 4.1 times estimated 2009 earnings, while Rockwood trades at 5.6 times and NOVA at 6.0 times. That compares with more than 10 times for the overall market as measured by the S&P 500.

 

Because of the violent and indiscriminate downward moves in stock prices, analysts have been hesitant to revise 2009 numbers, according to one chemical analyst.

 

“Sell-side analysts have not taken a good look at 2009 numbers yet. People are frozen because of the obscene and unpredictable stock market declines,” said the source.

 

“Analyst estimates in all groups lag at major turning points. They also end up being too low initially when things recover,” said another source.

 

On a fundamental basis, not only are world economies turning down, but the US dollar is rising against most currencies, making US chemical exports less competitive and overseas cashflows lower on translation impact.

 

Lower feedstock and energy costs will help, but not much if demand declines rapidly.

 

But companies have also been reluctant to guide 2009 earnings lower because they just don’t know by how much.

 

“It doesn’t pay to be the hero and be the first to announce an expected 20% decline in 2009. The market will punish you - fairly or not,” said another source.

 

Wall Street's analysts will have to take 2009 EPS estimates down - and by a lot - to reflect the new reality.

 

Wall Street profit outlook

 

Consensus earnings per share estimates

 

 

 

 

E2008 EPS

E2009 EPS

% Change

Stock price*

P/E (2009)

Majors/Diversified

 

 

 

 

 

Dow Chemical

$2.97

$2.59

-13%

$25.08

9.7

DuPont

$3.31

$3.15

-5%

$31.52

10.0

Celanese

$3.55

$3.20

-10%

$13.00

4.1

NOVA Chemicals

$2.80

$1.91

-32%

$11.53

6.0

Huntsman

$0.44

$0.87

98%

$12.86

14.8

Eastman Chemical

$5.34

$4.75

-11%

$38.77

8.2

Specialties

 

 

 

 

 

Rockwood

$2.04

$2.12

4%

$11.89

5.6

Nalco

$1.15

$1.41

23%

$12.56

8.9

Cytec Industries

$3.80

$3.94

4%

$25.81

6.6

PPG Industries

$5.17

$5.29

2%

$47.87

9.0

FMC

$4.36

$5.24

20%

$42.10

8.0

Albemarle

$2.68

$3.01

12%

$21.90

7.3

Valspar

$1.58

$1.77

12%

$18.80

10.6

Arch Chemical

$2.18

$2.60

19%

$23.77

9.1

Ferro

$1.38

$1.60

16%

$13.97

8.7

Lubrizol

$4.47

$4.93

10%

$34.18

6.9

* As of the close of 29 October, 2008 Source: Yahoo! Finance

 

 

To discuss issues facing the chemical industry go to ICIS connect

 


By: Joseph Chang
+1 713 525 2653



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