Chemicals
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MMM
CC |
If Glenview Capital's Larry Robbins is right, dump your 3M and Chemours now. (06 May 2019) Larry Robbins, the founder and CEO of Glenview Capital Management, is one of those rare individuals you unmute your TV for when you see his face. You can bet he has something interesting to say about the investment world, and his delivery is masterful. During Monday's Sohn Conference, he didn't mince words about two stocks he is shorting: 3M (MMM $177-$183-$220) and The Chemours Company (pron "KHUH moors", CC $25-$32-$53), and he clearly spelled out the reason why: the companies' intimate relationship with PFAS ("P-fas"), per- and polyfluoroalkyl substances, also known as PFCs. He calls these substances, which were invented by 3M in the 1930s, "forever chemicals" due to their incredibly long shelf life. Unfortunately, evidence is mounting that these chemicals, which are used in everything from Teflon® pans to Scotchgard® fabric protectors, are highly toxic to the environment—and they virtually never break down. While both 3M and DuPont, which recently spun off its Chemours unit, have already shelled out hundreds of millions of dollars to settle PFAS claims, Robbins believes this is just the tip of the iceberg. We agree: expect a mountain of litigation coming down the pike from class action lawsuits and state and local government suits. Back in 2016, following the spinoff, Citron Research called Chemours a "bankruptcy waiting to happen"—further claiming that DuPont jettisoned the company knowing full well what was coming. That assertion seems to be logical and quite believable. Steer clear of these companies.
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BAYRY
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Bayer falls double-digits in Germany as Roundup/cancer link story grows. (13 Aug 2018) When it's all said and done, $93 billion German healthcare and chemical conglomerate Bayer (American ADR symbol BAYZF $105-$107-$140) may be sorry the US Department of Justice approved the company's $66 billion purchase of Monsanto this past April. With that purchase, Bayer adopted the litany of legal problems surrounding the purported cancer risks surrounding Monsanto's main weed killer, Roundup. During Monday's trading on the German exchange, Bayer fell double digits after a California jury ruled that Roundup posed a substantial danger to consumers, ordering the company to pony up $289.2 million in punitive damages. Whether that amount is actually ever paid or not, it is the opening salvo in what will be an avalanche of lawsuits against the product, which contains the chemical at the center of the storm: glyphosate. Monsanto brought glyphosate to the market in 1974 under the Roundup name.
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SMG
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Can pot help Scotts Miracle-Gro get its groove back? This past January we reported that Scotts Miracle-Gro (SMG $73-$74-$110) had purchased a hydroponic joint, Hawthorne Gardening Company, in an effort to get its toe in the door of the burgeoning cannabis market. After that pickup failed to help the company's bottom line, SMG shares plunged about 20% and are currently down 30% year-to-date. Now, the company appears ready to double-down on the bet. Hawthorne has teamed up with Flowr Corp, a Canadian pot grower, to build a 50,000-square-foot cannabis research facility in British Colombia. The lab will be used to study all aspects of marijuana growth in an effort to create the right mix of products for the rapidly-expanding industry. It's an interesting proposition: if Scotts is successful in becoming a leader in the growth of cannabis, you can bet it won't be sitting on its 52-week low (which it hit last week) for long. SMG has a market cap of $4 billion (mid-cap core) and a p/e ratio of 23.
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SMG
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Scotts Miracle Gro drops double-digits on recreational marijuana news
(30 Jan 2018) Scotts Miracle Gro (SMG $81-$93-$110) was once a sleepy little agricultural name, best known for helping roses grow. Caught up in the recreational marijuana craze, the company's shares went sky-high after weed growers took to the firm's hydroponic division (SMG had purchased the Hawthorne Gardening Company to attract the business). Generally, a flat fiscal Q1 earnings report would be expected for Scotts, as it represents the off-season for ag suppliers. Analysts, however, expected the hydroponics unit to pick up the slack and cushion the figures. When that failed to manifest (SMG had a $0.92 per share loss), investors trimmed their positions, sending the stock down 14% on the day. Management blamed a regulatory "bottleneck" in California, which has issued only 1,900 cannabis licenses. Maybe Scotts can change its name to Scotts Miracle Gro Blockchain to regain its high. |
TROX
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Tronox loses nearly a quarter of its value after FTC issues complaint
(06 Dec 2017) Chemicals-maker Tronox (TROX $10-$19-$28) was off nearly 25% following a complaint issued by the Federal Trade Commission. In the complaint, the FTC argues that the Stamford-based pigment company's (think of the whites used in paint and industrial coatings) proposed takeover of Saudi Arabia-based Cristal for $1.67 billion would harm the global competitive environment for the industry. The acquisition would allow the combined entity to leapfrog over The Chemours Company (CC $21-$47-$58) as the world's leading producer of the critical white pigment, Ti02. For its part, CC was also down—about 6%—on a Goldman downgrade. |
POT
IPI |
Agriculture Giants Potash and Agrium Plan to Merge
(02 Jan 2018) Potash Corporation of Saskatchewan (POT) produces 20% of the world’s fertilizer products, including potash, phosphate, and nitrogen. Agrium (AGU), despite some nuanced differences, is a direct competitor—but still part of the same North American ag “cartel,” Canpotex. Unfortunately for players in the industry, China has an ever-increasing say over what the companies in this cartel can charge. The difficult nature of this business (POT has fallen 50% in value over the past few years) has compelled these two major Canadian firms to merge, forming a $36 billion ag giant. Under the terms of the proposed “merger of equals,” Potash shareholders would control about 52% of the new company; Agrium shareholders 48%. Based on the trailing twelve months, total combined top-line revenue would equal about $20 billion, while earnings (EBITDA) would come in at around $4.5 billion. The companies believe the synergies created by the merger would strengthen that bottom-line figure by at least $500 million. We like the merger, and believe it is absolutely necessary. That being said, we don’t like the amount of control China has over the industry. Ag products are fungible, and the communist country has recently been turning to Eastern European producers for their potash. China recently signed a major contract with Belarusian miner Belaruskali to buy potash for $219 per ton—30% less than they paid in 2015. Layer that on top of China’s economic slowdown, and we see a couple of great reasons to avoid this industry. Reprinted from this coming Sunday's Penn Wealth Report. |
KOP
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Under the Radar: Koppers Holdings
(19 Sep 2017) Koppers Holdings (KOP $30-$42-$46) is a Pittsburgh-based producer of carbon compounds, chemicals, and treated wood products for a number of different industries, to include: rail, utilities, residential construction, steel, and agriculture. Despite their small ($880 million) size, the company has a global manufacturing and distribution presence, with facilities in Asia, South America, Europe, Australia, and New Zealand. We like Koppers for a number of reasons. In addition to its small and nimble size, many of the company’s products are recession-resistant. With explosive growth potential, KOP has yet to take off this year, sitting up just 5% YTD. We are also overweighting the company's industry: specialty chemicals. |
HUN
CLZNY |
(22 May 2017) Huntsman and Clariant to merge, forming cross-Atlantic chemicals giant. Two chemical mid-caps, one in the US and one in Switzerland, are joining forces to create a new chemical giant. Texas-based Huntsman (HUN $12-$29-$27), which was founded in 1982 by the father of US ambassador to Russia, Jon Huntsman, will merge with Swiss-based Clariant AG (CLZNY $16-$21-$21), maker of plastics and pigments, in a $14 billion, all-stock deal. The new company will be called Huntsman-Clariant, with 50/50 representation on the board. Huntsman was up 8% on the announcement.
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Two of America’s largest firms are about to merge into one…and then split into three
(12 Dec 15) DuPont was founded in 1802 by an entrepreneurial young French émigré who thought that the milling of gunpowder might just be a profitable business in America. He was right. Sales rose each year for the company, especially during the War of 1812, and by the time of his death in 1834, his mills were well recognized in the United States.
Dow Chemical was formed in 1897 by Herbert Dow, a young chemist who was experimenting with new ways to extract bromine trapped underground in brine. The company only sold potassium bromide and bleach (a result of the extraction process) until World War I, at which time it began producing magnesium for use in munitions.
Barring a veto from the US Department of Justice or the Federal Trade Commission, it appears that these two historical industrial juggernauts will soon morph into one. And, shortly thereafter, break into three.
This marriage has been the dream of 11-year Dow CEO Andrew Liveris almost from the time he took the helm at that company. In 2006, in fact, he made his first attempt to buy the firm, but his offer was quickly rebuffed. Now, however, the table appears to be set for the merger to take place.
Both sides want, perhaps need, this deal. While some in the financial press have called it another sign of America’s decline as an industrial powerhouse, we don’t see it that way at all. While these companies aren’t in a moribund state, they haven’t exactly been fast growers of late. But the synergies created (not to mention the $3 billion in cost savings) by the merger could provide the spark needed to recapture some of that old magic.
When companies get too big and too diverse (hello, GE) to be nimble, it brings bad things to life. By chopping the merged company up into three separate entities, each with a dedicated focus, both R&D and employee morale should flourish. The three proposed companies would focus on: agriculture (23% of last year’s revenue); material sciences (plastics) and chemicals (48% of revenue); and specialty products, such as consumer goods (29% of revenue).
Investors were excited by the news, driving both companies up 12% on the day of the announcement. However, not everyone is smitten with the deal. Once the merger takes place, the new company would have a market cap of $130 billion. While not exactly in the same ballpark as Apple with its $650 billion market cap, the size has some farmers and workers’ organizations crying foul.
Many farmers have expressed concern that prices for seed and pesticides are sure to rise when two competitors become one, but that argument seems overblown. In the first place, the companies really don’t compete head-to-head in many agricultural product markets. Furthermore, there will still be BASF, Monsanto, Mosaic, and a little Chinese firm called Sinochem that has plans to take over the known universe. We believe the fear of a Chinese firm dominating the industry is a more rational concern than seed prices rising.
As is always the case with mergers, redundancies will be eliminated. In harsh terms, that means layoffs. We would argue that three vibrant companies with focused missions, however, should be better for the job market than two old, stodgy firms. Pain in the short term, but growth opportunities going forward. In short, we believe the deal gets done, farmers don’t see a spike in seed or pesticide prices, and Chinese government-owned Sinochem becomes the real loser. We are alright with that.
(Reprinted from the Journal of Wealth & Success, Vol. 3, Issue 50.)
What did we do with our Dow and DuPont positions immediately following the announced merger? Find out in this Sunday's Journal!(OK, got it. Take me back to the Penn Wealth Hub!)
(12 Dec 15) DuPont was founded in 1802 by an entrepreneurial young French émigré who thought that the milling of gunpowder might just be a profitable business in America. He was right. Sales rose each year for the company, especially during the War of 1812, and by the time of his death in 1834, his mills were well recognized in the United States.
Dow Chemical was formed in 1897 by Herbert Dow, a young chemist who was experimenting with new ways to extract bromine trapped underground in brine. The company only sold potassium bromide and bleach (a result of the extraction process) until World War I, at which time it began producing magnesium for use in munitions.
Barring a veto from the US Department of Justice or the Federal Trade Commission, it appears that these two historical industrial juggernauts will soon morph into one. And, shortly thereafter, break into three.
This marriage has been the dream of 11-year Dow CEO Andrew Liveris almost from the time he took the helm at that company. In 2006, in fact, he made his first attempt to buy the firm, but his offer was quickly rebuffed. Now, however, the table appears to be set for the merger to take place.
Both sides want, perhaps need, this deal. While some in the financial press have called it another sign of America’s decline as an industrial powerhouse, we don’t see it that way at all. While these companies aren’t in a moribund state, they haven’t exactly been fast growers of late. But the synergies created (not to mention the $3 billion in cost savings) by the merger could provide the spark needed to recapture some of that old magic.
When companies get too big and too diverse (hello, GE) to be nimble, it brings bad things to life. By chopping the merged company up into three separate entities, each with a dedicated focus, both R&D and employee morale should flourish. The three proposed companies would focus on: agriculture (23% of last year’s revenue); material sciences (plastics) and chemicals (48% of revenue); and specialty products, such as consumer goods (29% of revenue).
Investors were excited by the news, driving both companies up 12% on the day of the announcement. However, not everyone is smitten with the deal. Once the merger takes place, the new company would have a market cap of $130 billion. While not exactly in the same ballpark as Apple with its $650 billion market cap, the size has some farmers and workers’ organizations crying foul.
Many farmers have expressed concern that prices for seed and pesticides are sure to rise when two competitors become one, but that argument seems overblown. In the first place, the companies really don’t compete head-to-head in many agricultural product markets. Furthermore, there will still be BASF, Monsanto, Mosaic, and a little Chinese firm called Sinochem that has plans to take over the known universe. We believe the fear of a Chinese firm dominating the industry is a more rational concern than seed prices rising.
As is always the case with mergers, redundancies will be eliminated. In harsh terms, that means layoffs. We would argue that three vibrant companies with focused missions, however, should be better for the job market than two old, stodgy firms. Pain in the short term, but growth opportunities going forward. In short, we believe the deal gets done, farmers don’t see a spike in seed or pesticide prices, and Chinese government-owned Sinochem becomes the real loser. We are alright with that.
(Reprinted from the Journal of Wealth & Success, Vol. 3, Issue 50.)
What did we do with our Dow and DuPont positions immediately following the announced merger? Find out in this Sunday's Journal!(OK, got it. Take me back to the Penn Wealth Hub!)