Huntsman’s Products Permit Turbo-Charged Performance in Cars, But Not In Its Own Profits

Innovation is wonderful, and Huntsman has won plaudits for its role in creating a new carbon chassis for Lamborghini. But a downturn in demand and pricing for one of its staples products is likely to weigh on its fourth-quarter earnings.

Reviewers have labeled Lamborghini’s new two-door sports car, the Aventador, as “bold and brash”, stunning and capable of tremendous speed and power. And one of the reasons may be the fact that the new vehicle – whose retail price hovers at around $380,000 – boasts a new carbon composite chassis that removes noise and vibration, improves the car’s speed and performance, while not compromising on strength. It’s all due, Lamborghini says, to a new resin product developed by chemicals company Huntsman Corp. (HUN.N). Sadly for Huntsman, however, its business isn’t confined to selling innovations to luxury auto manufacturers, and some of its other chemical products are having a much more difficult time in the market, weighing on the company’s earnings outlook.

Most notably, Huntsman is suffering from a drop in demand for titanium dioxide, a pigment that makes white paint and coatings on everything from ocean liners to sporting equipment look whiter and brighter, and that adds opacity to food coloring and sunscreen. But prices for titanium oxide dropped in the fourth quarter in response to a decline in demand, and that, analysts agree, is likely to eat into Huntsman’s results for the just-ended quarter. In July, the company could sell titanium dioxide for $2 a pound; by the end of December that had fallen to just over $1.60 a pound.

The outlook for the company’s earnings is also affected by Huntsman’s debt load. The company is much more leveraged than its peers, with its debt to equity ratio of 1.7 comparing unfavorably to the industry median of 0.54. Today, although total debt has declined somewhat since 2010, it still stands at $3.7 billion, while the company’s cash has decreased steadily from more than $1 billion to less than $500 million over the same time period. That relatively high debt load is one reason Huntsman scores only 12 out of a possible 100 on the component of the StarMine Structural Credit Risk (SCR) Model measuring leverage, and a score of 9 on the SCR model itself. The model assigns an implied credit rating of BB for Huntsman.

Analysts who follow Huntsman’s fortunes have taken note of the weakness in the titanium dioxide market. The company’s pigments segment contributed $346 million to its earnings before interest, income taxes, depreciation and amortization of $1.083 billion during the first 9 months of the year until September 31, 2012; moreover, it generated the highest margins of any business for the company during that period. Analysts have responded by cutting their earnings estimates for the company’s fourth quarter earnings. In early November, the consensus estimate stood at 32 cents a share; today it has tumbled to only 23 cents a share. But the StarMine SmartEstimate, which places a greater weight on the most recent estimates and those by analysts with the greatest track record for accuracy, suggests that the company may report earnings of only 22 cents a share when it announces its fourth-quarter results on February 11. That gives Huntsman a negative Predicted Surprise of -5%. Since the company reported its third quarter earnings on November 2, 2012, commenting on the weakness in the pigments division in both the earnings release and its conference call, every analyst but one who had published an estimate for Huntsman’s fourth quarter earnings responded by cutting it. (The exception to this rule has actually raised his earnings estimate, but it still remains below the consensus level.) Moreover, analysts also have cut forecasts for the coming year as well, not only for earnings but also for Huntsman’s revenues and EBITDA. That suggests they think this pricing and demand weakness will linger over the course of 2013 rather than proving to be just a hiccup.

Adding to the company’s headwinds, Huntsman’s inventory levels have increased. Inventory days touched 75 days in the third quarter, well above the industry median of 66 days and the highest level that Huntsman has reported since June 2009. Higher inventory levels also serve as a signal of weak demand for Huntsman’s products.
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Indeed, in each of the last two quarters, Huntsman has reported that its revenues were down from the level recorded four quarters ago; in the third quarter, those revenues were 7.9% below year-earlier levels.

So while the owners of the new Lamborghini high-performance roadsters can speed along the highways relishing the experience made possible by one of Huntsman’s products, the chemicals company itself may be lucky to generate a similar level of enthusiasm among investors when it reports its fourth-quarter earnings next month.

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