BASF: hazardous material
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All of us want the best deal. Indeed, one popular television show in the US seeks out “extreme” cheapskates. Value style portfolio managers should fit into this camp, and what better time for them to get their shopping lists together? Share valuations of some companies have hit decade lows.
At a little over nine times forward earnings, BASF, the German chemicals producer, is one of these. The company cut its earnings outlook substantially after the market closed on Friday. Bargain hunters may like the low entry price, but the stock will get cheaper and more attractive in months to come.
For one thing, BASF depends on automakers. And they are not doing well. In the world’s largest market, China, unit sales of passenger cars fell 14 per cent year on year, in November. This year, US carmakers should have their worst year of annualised sales since 2014. A fifth of BASF’s sales go to this industry, says Bernstein. Partly for this reason the company’s Functional Materials segment took the largest hit to operating profits last quarter, down about 25 per cent year on year.
BASF depends on its bulk chemicals business, which accounts for half of operating profits. Here, there may be some good news ahead. As oil prices fall, input costs should too. Naphtha, a byproduct of oil that is used in petrochemicals, has collapsed in price along with crude in the past six weeks. Both BASF and Covestro, the Bayer spin-off that also warned about its outlook in late October, should eventually benefit from lower costs.
The company’s shares fell 4 per cent on Monday morning, after a year in which the stock nearly halved. While some value investors have reportedly begun to nibble, most will wait. Plenty of supply in bulk chemicals will come on stream in the next couple of years. Next year alone global capacity should expand by more than 4.5 per cent.
A rebound at BASF would depend on the market discounting auto woes too heavily and appreciating lower costs too little. It is understandable that many investors cannot be bothered trying to time stocks as out-of-favour as chemicals groups.
*This article has been amended to reflect that November car sales in China fell 14 per cent not 18 per cent
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