Buy the Best Value in the Chemicals Sector

“Better living through chemistry,” so went the old marketing slogan.
That was then, this is today. Chemical companies today loathe to reveal themselves as chemical companies in their marketing. The fact remains that life has been bettered by chemistry.
Investment portfolios can also be bettered through a well-run, profitable chemical company. Innospec (NASDAQ: IOSP) is the well-run, profitable chemical company to better investment portfolios.
The chemicals sector stock likely draws a blank. As opposed to focusing on the world, like giants DowDuPont (NYSE: DWDP), BASF (OTC: BASFY), and Sinopec (NYSE: SNP), Innospec focuses on the niche. Innospec sold $1.2 billion of its chemicals over the trailing 12 months.
Innospec might be small as a chemicals sector stock, but its operations are sufficiently diversified. The operations are slotted into one of four segments: fuel specialties, performance chemicals, oilfield services, and octane additives.
Fuel specialties and performance chemicals are the drivers. They account for 72% of revenue and 76% of segment operating income.
All Innospec’s segments have performed well this year. Revenue is up for all four over the first nine months of 2017. Innospec reported revenue of $953 million for the first nine months of 2017 compared with $646 million in the same year-ago period.
Operating income is mostly up. Fuel specialties operating income increased 4.6% through the first nine months; performance chemicals operating income, in comparison, soared 67%.
Innospec’s revenue soared 62% to $332.4 million year over year in the quarter. The top-line growth was driven by strong sales across all core businesses.
The dividend yield is also up. Ionnospec pays semi-annual dividends. The dividend has been increased every half-year for the past seven halves.
Reflecting on recent successes is nice. The prospect of the future drives the value proposition.
Innospec management waxed positively about the future for the remainder of 2017 and the beginning of 2018 in a third-quarter meeting with analysts. Innospec will focus on improving operating and net margins, actually down year over year for the quarter.
Innospec’s new enterprise, Innospec Chemical (Beijing) Co. Ltd., is expected to expand Innospec’s presence internationally. The Beijing operation enables the company to manage and trade inventory locally and expand its business in the second-largest economy — China.
Management also highlighted the strength of Innospec’s balance sheet. Debt to equity is low at 32%. Current assets are high compared to current liabilities. The former outnumbers the latter by a two-to-one margin. The strong balance sheet will enable management to pursue accretive acquisitions to create additional shareholder value in 2018.
Improved operating performance, and the prospect of improved business performance, translates into improved share-price performance.

Chemicals Sector Stock: Shares on the Move

Innospec’s strong operating run of late has powered the share price higher. The shares are up 19% since Innospec reported third-quarter results a couple months ago.
Even with the recent price surge, Innospec shares are up only 3% year to date. The Russell 2000, an index of small-cap stocks, of which Innospec is one, was up 15% year to date. Innospec’s business peer group — diversified chemicals — is up 29% year to date.
Innospec trails its peer group share-price performance. It beats it on value.
Innospec has earned $3.62 per share over the trailing 12 months. The current P/E multiple is a reasonable 20. Its peer group sports a 29.6 P/E multiple.
Innospec should earn $1.20 for the fourth quarter. Full-year 2017 EPS should post close to $3.90. The P/E multiple 2017 drops to 18.7, an even better value.
When we consider the new year, we find a company that’s expected to grow EPS 14%. Innospec should earn $4.45 per share. Innospec’s peer group is expected to grow EPS 8% this year.
The peer group trades at a 17.7 multiple to 2018 expected earnings; Innospec trades at a 16.4 multiple. Innospec is the value-priced stock among its peers. Innospec grows earnings faster than its peer group, yet its shares trade at a discount to its peer group.
Better living through chemistry? Yes. Better investing through the best value in the chemical industry? Yes.