A Citi Research report issued today highlights that shareholder activism is not limited to the tech and pharmaceutical sectors. Analysts P.J. Juvekar et al. point out that the increase in investor activism in the sector has led management of companies in the Chemical sector to take a more proactive approach. “The Chemical industry has turned out to be a fertile ground for activists starting in 2013, and these activists are having varying degrees of success. But one thing is for sure, the thought of an activist shareholder has sprung managements into action.”
Shareholder activism: Portfolio pruning, cost-cutting and stock buybacks
A number of companies in the chemical sector have undertaken or are planning steps to increase shareholder value and head off potential shareholder activists. The report offers some recent examples including a significant portfolio re-evaluation at E I Du Pont De Nemours And Co (NYSE:DD) that resulted in the spinoff of the TiO2 business, the divestiture of the phosphate division at CF Industries Holdings, Inc. (NYSE:CF), and the separation of the chlorine and epoxy businesses at The Dow Chemical Company (NYSE:DOW). The analysts also note Air Products & Chemicals, Inc. (NYSE:APD) is looking for a new CEO.
The report also points out that stock buybacks are becoming the norm today. “4Q 13 featured significant new buyback announcements by DD ($5B, or 8.5% of market cap), DOW (~ $4.2B , 7.5 %), and PX ($1.9B, 5%), which join others with large buybacks already in place including LyondellBasell Industries NV (NYSE:LYB) (30mm shares, 5.5%) and CF ($1.7B, 12.5%)”
Shareholder activism: Cold snap impact overblown
The Citi analysts also suggest that the recent cold weather-related increase in the prices of propane and ethane is overblown and represents a buying opportunity. “Bottom-line: we think the pullback in LyondellBasell Industries NV (NYSE:LYB), The Dow Chemical Company (NYSE:DOW) and Eastman Chemical Company (NYSE:EMN) shares due to higher ethane/propane prices is a buying opportunity. Our supply/demand analysis shows that the current 300,000 bbl/d of ethane oversupply will reach ~600,000 bbl/d by 2020.”
Shareholder activism: PPG/VAL pair trade
The report also includes an investment recommendation to go long PPG Industries, Inc. (NYSE:PPG) and underweight The Valspar Corporation (NYSE:VAL) as a sector pair trade. Juvekar at al. explain their thesis for the pair trade below. “We prefer PPG’s favorable industrial exposure (auto OEM, aero) as several of VAL’s key markets (off-road machinery, shipping) face headwinds. From a geographic standpoint, we are cautious on VAL’s exposure to Australia (9% of sales) and China (11%). PPG boasts a pristine balance sheet (~1x net debt-to-EBITDA) with another $1.5B of cash expected from the Transitions sale in mid-‘14, while VAL has less balance sheet flexibility (2x net debt-to-EBITDA).”