From: Nicole Urken
Sent: Tuesday, April 10, 2012 4:33 PM
To: James Cramer
Subject: Gameplan follow-up (Tues afternoon)
Owens-Illinois reports Q1 2012 results, should exceed prior year first quarter 2011 earnings from continuing operations of $0.50/share by more than 35 percent (consensus is $0.50). Stock up 8% after hours
Alcoa beats by $0.13, beats on revs; reaffirms FY12 global alumina demand +7%. Stock up 5% after hours
From: James Cramer
Sent: Tuesday, April 10, 2012 7:45 PM
To: Nicole Urken
Subject: RE: Gameplan follow-up (Tues afternoon)
Owens Illinois-nat gas?
With natural gas futures dipping below $2 this week for the first time in a decade, we have been hearing renewed calls for a bottoming in the fuel. Investors quickly scrambled for plays with the coal names, like Alpha Natural Resources which was up 10 percent on Thursday. Prospects of a bottoming in nat gas (i.e. less fuel switching risk), realization of continued supply constraints, the idea that coal production cuts are in the past, and anticipation for a strong China gross domestic product number led to the initial rise. However, the coal sector fell again on Friday after the perceived disappointing China GDP number (8.1 percent) and continued uncertainty. Ultimately, the coal names are extremely volatile and extremely vulnerable to macro China sentiment (not to mention continued energy volatility and regulatory rumors). Bottom line: You really have to have a strong stomach to venture into the coal cohort. Just look at the reversal on Friday.
Given this volatility, a better way to play the low nat gas prices is through the names that have nat gas as a major input cost. Even if nat gas is showing signs of a bottom (something, by the way, that many have predicted for some time now amidst continued weakness in the fuel), the reality is that prices are going to remain low for the foreseeable future given the supply picture with still minimal support for the fuel.
We have already seen upside preannouncements from Owens-Illinois, PPG Industries and Sherwin-Williams — no coincidence.
These three names should continue to benefit from low nat gas prices, along with strong fundamental drivers, and should be bought on pull-backs.
Coatings company PPG, which pre-announced last Thursday, will be exiting many of its legacy nat gas hedges this quarter and should see a $0.30 EPS benefit for every $1 change in nat gas futures (per Wells Fargo). Additionally, the company’s leverage to auto and aerospace cycles positions it well for upside as we continue a cyclical recovery in the U.S., not to mention strong emerging market exposure.
Sherwin-Williams — which is more levered to architectural coatings — also preannounced to the upside this Monday, and the stock too remains a beneficiary of lower input costs along with being a play on the recovering housing market.
At Owens-Illinois, while we didn’t get much color into the improved earnings picture story announced on Tuesday, the company’s glass container operations require a continuous supply of energy — including natural gas. Though of course the company enters into futures contracts and also passes on many of its costs, a reduction in these input costs are a positive going forward. In other words, while the upside is likely largely because of strong operational performance, low nat gas prices are indeed an incremental benefit.
These pre-announcements set the stage for the “nat gas beneficiary” trade leading into the quarter, where the chemicals cohort is the best positioned.
The commodity chemical names will see the most impact from lowered nat gas prices. Per Wells Fargo, Westlake should see a $1.00 EPS impact for every $1 change in nat gas futures, Georgia Gulf should see a $0.50 impact, and Lyondell Basel should see a $0.30 impact. Dow Chemical too, which just boosted its dividend by 28 percent on Thursday, is well positioned (EPS impact for that name is about $0.20).
Additionally, while Dupont — the chemical conglomerate — isn’t as heavily levered to nat gas prices (~$0.10 EPS impact), it too should see an incremental benefit. We have highlighted this name as an innovator on "Mad Money," aligning itself to solve three important themes of today’s world: (1) feeding the world, (2) reducing dependence on fossil fuels, and (3) protecting people and the environment. Through its agriculture and nutrition biz, its chemicals biz and industrial biosciences biz, Dupont is well positioned with a strong long-term plan and good emerging market exposure to boot.
A word of caution: Some consumer staples names like Kimberly-Clark are often cited as beneficiaries of lower natural gas because of potentially reduced input costs. However, resin prices have remained elevated largely because of the monopolistic nature of the suppliers (more benefits on the chemicals side for names like DOW!) and have been decoupled for nat gas. So wouldn’t venture in these names as nat gas plays at the very least.
The bottom line: Low nat gas prices aren’t bad for everyone. With earnings season ahead, we should hear more about the nat gas beneficiary trade from the chemicals companies.