Huntsman Corporation

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Huntsman Corporation is a global manufacturer of differentiated and specialty chemical products, operating through Polyurethanes, Performance Products, and Advanced Materials segments, catering to a wide variety of industries.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Huntsman’s business is complex. They operate in cyclical industries which are very sensitive to economic conditions and often have intense competition. The company has diverse businesses which are difficult to understand and analyse. However they create essential raw material for many industries.

Business Overview:

Huntsman operates across three main segments:

  • Polyurethanes: This segment offers MDI, polyols, TPU, and other polyurethane products and systems used in insulation, comfort cushioning, adhesives, elastomers, and coatings. Polyurethane is used in a diverse amount of products including clothing, furniture, and automotive.
  • Performance Products: This segment is primarily focused on amines, specialty chemicals, and intermediates used in a variety of applications such as detergents, cleaners, and industrial adhesives.
  • Advanced Materials: This division is centered around specialty chemicals, resins, and composite materials for aerospace, automotive, electronics and other applications.

Huntsman’s business is very diverse which can make it harder to analyze, but also somewhat reduces dependence on one industry.

Industry Trends and Competitive Landscape:

The chemical industry is cyclical, characterized by periods of strong demand followed by periods of overcapacity and price declines. Competitive dynamics are intense, with numerous companies vying for market share and new capacity being added all the time. The business is highly sensitive to the economic outlook, as changes in industrial production or consumer spending impact demand for chemicals and materials. However, some segments such as specialized additives, have less intense competition.

The rise of environmental concerns and regulatory pressures is pushing companies toward developing more sustainable and eco-friendly products. A good portion of Huntsman’s materials are used in green / energy efficient tech. They are also working on developing more sustainable products.

What Makes Huntsman Different?

Huntsman has a unique position in the chemical market, operating a huge global scale and a broad range of products. The company claims that their technology is a differentiating factor and they aim to offer a combination of differentiated products as well as commodities in a global environment. The company also notes that they are focusing on developing more sustainable and eco-friendly products. It does have good geographic diversity, but they do have strong ties to Asia, particularly China.

Financial Performance and Moat Analysis:

The best businesses in the world are easy to understand with a wide moat and have excellent financial health. Huntsman is a difficult business to understand with a debatable moat and it has an average financial health score.

Huntsman’s performance over the past few years has been volatile. The business is affected by the demand and prices of raw materials and commodity chemicals. They have had good years such as 2022, which had extremely high prices which led to high profits. However, as pricing has normalized and supply chains have improved the prices have crashed which has led to losses in some quarters.

  • Moat Rating: 2/5 Huntsman has a narrow moat due to its global scale and a combination of differentiated and commoditized products. While a few specific product lines may have strong moats, it is difficult to generalize the entire business, so this moat is not wide, and also not permanent. The company does not have a superior technology, but rather a cost leader model in some business.
    • Intangible Assets: The company has some patented technologies in Advanced Materials segment. In general patents are not too valuable, as they may be easy to innovate or create around them.
    • Switching Costs: In some cases, such as their performance materials, customers may face some switching costs.
    • Cost Advantages: Huntsman has economies of scale in some manufacturing processes, but these can be replicated by competitors and are not very durable. Some production facilities in low cost countries are only temporary competitive advantages.
    • Network Effect: The company does not have network effects, so its moat is not very wide, especially compared to tech companies that use network effects.
  • Understandability Rating: 3/5 The company’s business model, and its financials are complex to understand due to diverse business segments, cyclicality of commodity markets, and the influence of broader macroeconomics. However, understanding each product, what its used for and if it is a commodity is straight forward, its the bigger picture of different moving pieces that are complex.
  • Balance Sheet Health: 3/5
    • The company has a reasonable liquidity position. Most of its assets and liabilities are related to its operations.
    • They have a relatively high leverage and net debt to total capital ratio of around 50%. However, most of the debt is long term debt.
    • They have negative equity, but this is due to goodwill and intangibles.
    • They have a low current ratio and quick ratio indicating that they have more debts than liquid assets which implies that liquidity is bad, but they are still liquid.

    The debt levels are concerning since they are in a volatile industry. And some loans are variable-rate that become problematic in periods of high interest rates. The company would need to reduce their leverage to attain a better balance sheet health rating.

Due to high leverage and the cyclical nature of its industry, the business is vulnerable to downturns and periods of high interest rates.

Risks and Resilience:

Huntsman’s moat is susceptible to several risks: * Cyclicality and Commodity Volatility: The company’s revenue and margins are tied to the cyclical nature of the chemical industry, which can lead to sharp swings in profitability. * Raw Material Price Volatility: Cost advantages may diminish due to changes in raw material costs, especially since many raw materials such as oil and gas are traded internationally, and are subject to various global macroeconomic factors, some of which cannot be controlled or predicted. * Competition: While the company has large scale operation, it still faces competition in many of their products.

  • Technological Disruption: New materials and technologies can substitute their current offerings.
  • Economic Slowdowns: Lower industrial production or reduced consumer spending can create severe declines in revenues and profitability.

The company has been using acquisitions as a growth strategy. These can lead to dilution and can hurt shareholder returns if they do not bring the expected profits.

Recent Concerns and Controversies:

  • The company has had losses in some quarters due to normalization of raw material prices. The company plans on improving operations and cost cutting measures to improve results.
  • They have taken out debt to acquire more businesses, which makes them vulnerable to high interest rates and economic downturns.
  • There has been discussion on how the company will reduce its carbon footprint. The long-term cost and investments required to switch to different energy is not fully understood and is not likely to be cheap.

Management Perspective:

The management has stressed they will continue to invest in technology to differentiate themselves, while lowering their cost structure to improve profits. They also note that they believe they are well positioned to benefit from the growing demand for sustainable and energy-efficient technologies. They say they are taking actions to reduce debt.

In summary, Huntsman Corporation is a complex business with a narrow moat and average financial health. The company is trying to position itself for the future by developing new sustainable products and making acquisitions that can enhance their business. However, the company is at risk from high debt, volatility in prices and also intense competition.