Chemical companies are in the sweet spot thanks to declining oil prices and the weak dollar, Cramer said. So investors should be looking to put their money in this sector.
Not every stock will work, though. There are certain factors that need to be considered before buying in. How much demand is there for chemical products? How good are the company’s margins? How big and safe is the dividend? Cramer suggested that investors also look at end-market strength, product diversification and cost control.
You can see why oil prices and the weak dollar play in here. Since oil and petroleum-based products make up the bulk of a chemical company’s raw costs, declining prices mean wider margins. And those end markets are going to be much more friendly to American chemical products if the primary currency there is the much stronger euro.
So which stock is the buy? Cramer said he’d pick PPG over Dow Chemical and DuPont. (Click here for more about DuPont.)
PPG’s superiority stands out when you look at the overall business. While Dow has 10% exposure to the ailing auto industry, PPG has just 4%. In fact, Cramer pointed out that a lot of people don’t recognize how far PPG has moved away from its roots at Pittsburgh Plate Glass.
And there’s a great diversity of products, too. Commodity and specialty chemicals combined accounted for just over 50% growth in the third quarter. Beyond performance coatings for planes, ships, solar cells and windmills, PPG also controls about 18% of the market for prescription-glasses lenses. This, in particular, is one such business that could see exceptional growth overseas.
PPG’s 4.6% dividend looks safer than Dow and DuPont, too, because the company expects to earn more than double its payout. And PPG is the only one of the three that raised its dividend this year. Companies don’t do that if they’re expecting to cut back on that payout.
It’s not that Dow, the world’s largest chemicals company, isn’t diversified. But on top of that autos exposure, 30% of the company’s earnings are exposed to the downside of the commodities cycle. Just in the past two months, North American ethylene producers have cut back on almost 29% of their capacity due to lesser demand. Dow closed two of its related plants, which accounted for 3.2% of North American ethylene capacity, as a result.
There’s also that Rohm and Haas acquisition, for which Cramer thinks Dow overpaid. The deal looked like a good one before the credit crisis, but not anymore. There’s a good chance Dow’s stock would be much higher if it weren’t for this purchase.
Finally, when you factor in Dow’s expected $1.98 in 2009 earnings is only 30 more than its annual dividend, making the payout less reliable, it’s apparent why Cramer thinks PPG is the better stock.
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