As recently as two years ago, the mere idea of an initial public offering of stock in a plastics and chemicals company would have been as welcome as a machete salesman taking his sample kit through an airport checkpoint.
The infamous petrochemical industry cycle was down, as was much of Wall Street. Combine that with increased reporting standards required by the Sarbanes-Oxley Act, and you would have had a hard time selling plastic/chemical shares even if you threw in free cell-phone minutes.
But what a difference 24 months makes. In the past eight months alone, four such firms have pulled back the curtain, and two of them have met with success. Higher selling prices and profit margins are part of it, but a change of thought among the investment community also seems to have taken place.
The biggest beneficiary of this IPO boomlet has been Westlake Chemicals Corp. of Houston, whose products include PVC and low density polyethylene. Westlake stock debuted in August at around $15 per share, but was near $28 on April 21.
Celanese Corp., Huntsman Corp. and Lanxess AG have followed suit in 2005, with mixed results. As of April 21, Lanxess was up 15 percent from its debut number, but Celanese had dropped 5 percent. Huntsman had suffered the most, tumbling about 15 percent in its brief public life. Both Celanese and Huntsman surpassed their starting points for a brief while before descending. Those short-term results may not be as encouraging as Westlake's, but they're proof that the scorn once heaped upon such stocks has dissipated to some extent.
And the market may not have seen the last of such opportunities this year. Arkema Group — a spinoff of several chemicals businesses belonging to Total SA, including its acrylic sheet unit — is heading for IPO-land as well. World PP leader Basell Polyolefins could join Arkema, but there are so many suitors fighting for that firm right now — including Iran National Petrochemical Co. and several private equity firms — that it probably will be stopped short of the IPO gates.
The runups enjoyed by other plastics-heavy firms are equally impressive. Since early 2003, Dow Chemical's share price is up about 33 percent to $45. At Nova Chemicals Corp., its current $30 level is 40 percent above where it was in early 2004. Since late 2004, Wellman Inc. has rebounded 50 percent to $12. Lyondell Corp., parent of polyolefins giant Equistar Chemicals LP, has seen its stock price jump about 67 percent to $25 since early 2004. The stock of DuPont Co., home of the world's largest nylon business, has climbed almost 30 percent since early 2003, and it now trades at around $48.
Jeff Dancer, an industry veteran currently serving as president of Allan Dow Group, an investment firm in Houston, said plastics and chemical firms can take part of the credit for their higher stock prices.
“People perceive that [plastics and chemical companies] have done a good job of improving margins and keeping supply/demand balances tight,” Dancer said. “These firms have withheld from betting on growth, and that's improved their profitability.
“In the past, they'd look four or five years ahead and say, 'Let's build, because we think someone will buy it,' ” he added. “The problem was, three or four other companies had the same idea and there'd be oversupply.”
Even plastics firms that aren't fully back-integrated have done well of late. Compounder/distributor PolyOne Corp. has more than doubled its share price to $8.10 since late 2003. Compounder A. Schulman Inc. has seen a boost of almost 18 percent since early 2003, while the recent $2.70 price of compounder ICO Inc. is almost triple its late-2003 level.
Most impressive — and surprising — may be the performances of the stock of Georgia Gulf Corp. and Eastman Corp. Those venerable outfits have tightened their focus in recent years — Georgia Gulf in the vinyls chain and Eastman in PET and polyester — and investors have rewarded them, even as they've become less diverse. Georgia Gulf stock was at $20 in mid-2003 but now is at about $41. Eastman has rocketed from $30 in early 2003 to a recent $52.
But Dancer, who spent 25 years with Phillips Petroleum Co., said a peak may be at hand. The market has backed up his belief in the past month, with most of the stocks listed above cooling by 10-20 percent.
“I'm not sure if there's additional upside potential here,” he said. “Some of these stocks may have gone as far as they can go.”
At Bank of America Securities LLC investment firm in New York, analyst Kevin McCarthy is a little more optimistic. He said he does not expect to see the commodity chemicals market peak until 2007. The company has buy ratings on Celanese and Lyondell, but is neutral on Dow, Eastman, Nova, Westlake and Georgia Gulf.
Dancer added that he's concerned about the lack of investment in research and development channels, in spite of those recent sky-high valuations.
“There was a time when investors were pleased to see strong R&D and spending on new markets and applications,” he said. “But today, the major chemical companies aren't even reinvesting to the levels of depreciation, which kind of means they're liquidating.”
At least for now, investors who have almost doubled their money on the Westlake IPO — and made a bundle on similar stocks — don't share Dancer's concerns.
Frank Esposito is Plastics News' Akron, Ohio-based reporter who covers materials suppliers and resin pricing.