Is Huntsman a Perfect Company?

All eyes are on Huntsman (NYS: HUN) now as speculation regarding the company being sold is thick in the air. Whether it actually happens remains to be seen. But this news has sure made me sit up and take notice.

If a company does buy Huntsman out, will it not have to deal with any challenges? Is Huntsman a perfect company? Only a detailed scrutiny can give us a better picture. Let's dig a little deeper to see where Huntsman stands.

Strengths

  • Strong positioning -- Huntsman enjoys a market share of 18% in MDI, a key product of its largest division -- polyurethanes. This is way above chemical major Dow Chemical's (NYS: DOW) market share of 12%.
  • Wise management -- In times of rising costs, Huntsman has consistently tried to boost margins through strategies such as cost cutting and price increases. It is aiming for $200 million in cost savings during the next 18 months. The company even secured nearly 40% of its input requirements for this year by booking contracts when prices were low.
  • Strong operational performance -- Huntsman's gross margin for the last 12 months was nearly 17% -- better than Dow Chemical's 15% -- indicating management efficiency. Its revenue grew at a decent rate of 16.5%, and net income grew at an impressive 33.3% during the past year. A consistent dividend payer, Huntsman yields a handsome 3%.
  • Global presence -- Markets outside the U.S. and Europe account for more than a third of Huntsman's revenue, with nearly 45% of its MDI revenue coming from emerging markets. The company, which has joint ventures in China and Russia, continues to invest in the developing markets.

Weaknesses

  • Highly leveraged -- Huntsman's total debt-to-equity ratio is high at 189.5%. A cash balance of a little more than $400 million and unlevered free cash flow of more than $500 million appear a little weak. Moreover, a good portion of its cash flows go toward debt obligations, which reduces the availability of cash for other purposes such as investing in growth.
  • Troublesome two -- Two of the company's five divisions -- textile effects and advanced materials -- have been laggards for a year or so because of rising costs and falling sales. Since they are based out of Switzerland, appreciation of the Swiss franc against the U.S. dollar added to its woes. Although a restructuring program is under way, there will be additional costs for the company.
  • European risk -- Europe accounts for 30% of Huntsman's total revenue. With the nation not showing signs of turning around anytime soon, Huntsman could have a tough time ahead.

Opportunities

  • Gassing up -- A sharp dip in natural gas prices (important input for chemical makers) has triggered several investments in the industry. Both Dow Chemical and Westlake Chemical (NYS: WLK) , for instance, are increasing ethylene capacity with the help of new plants or upgrades. Huntsman is making similar investments, too. Moves initiated to take advantage of cheap gas could prove to be a boon in the future.
  • Green opportunity -- Greater worldwide emphasis on energy savings means more opportunities for MDI products, which are used for insulation purposes. MDI insulation is projected to grow at more than 10% in the next five years.
  • Pigments -- After a slow period, demand for white pigment titanium dioxide is rising again. Peer Kronos Worldwide (NYS: KRO) , which accounts for 10% of the industry's total TiO2 capacity, is expecting this year's TiO2 sales volumes to top 2011 levels. Huntsman, which also enjoys a 10% share, should benefit, too.
  • Housing recovery -- The housing market is showing visible signs of recovery. Huntsman should benefit from this as higher home sales would mean more takers for its paint pigments, epoxy, and other products.

Threats

  • Global slowdown -- China and India, which are markets with great potential because of their sizable investments in infrastructure, energy, transportation and agriculture, are slowing down. This could hurt Huntsman's growth opportunities.
  • Europe's a problem -- Europe seems to be in a mess right now and continues to be a source of concern for Huntsman.

The Foolish bottom line
Huntsman comes across as a strong company that can handle macro challenges. Its founder's aim to "improve shareholder value substantially" this year is a good enough reason to keep a tab on the company. Click here to add Huntsman to your stock watchlist.

While you wait for some big news from Huntsman, take a look at this can't-miss opportunity to own a stock with both stability and growth potential by reading The Motley Fool's free report on our Top Stock for 2012.

The article Is Huntsman a Perfect Company? originally appeared on Fool.com.

Neha Chamaria does not own shares of any of the companies mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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