Speculating on Chemicals

If you’re looking for the silver lining in this awful market, perhaps it’s worth taking a peek at the chemical space – where consolidation is ramping up as once-indestructible chemical giants look to brace against out-of-control raw costs.

Just yesterday Dow Chemical announced it was buying specialty chemical maker Rohm & Haas at a huge premium. That was followed today by Ashland saying it would pay another big premium for another specialty chemicals maker, Hercules . Because these companies use a lot of oil and natural gas to make their products, it makes sense for them to be looking for deals in specialty chemicals, which are less dependant on the high price of energy.

So, it being Speculation Friday on Mad Money, Cramer is betting on another takeover in the space: PPG Industries , a conglomerate with great exposure to the “right” markets and limited exposure to the “wrong” ones.

More than half of PPG’s sales come from abroad, so it’s already looking good. The company has strong businesses in aerospace, protective and marine and optical and specialty materials. It’s actually a new-tech play as well as it makes coatings for solar cells and windmills, as well as fiberglass for windmill blades (think Owens Corning ), although admittedly it’s a small piece of the pie – but still, more than its peers.

The hope is that PPG will get gobbled up by another big chemical player looking to diversify. But even if that doesn’t happen right away, the stock is a buy on its 3.8% yield. The company is basically paying you to wait for a takeover, Cramer said. And even if PGG doesn’t get a bid, the deals that are coming out of the chemical industry are so high they’re bound to send other chemical stocks higher.

Make no mistake, the stock is still speculative. It’s still highly dependent on raw costs, even if it’s less so than its peers, as well as the strength of a global economy that may be weakening. But with the huge premiums being paid out in the rest of the industry for specialty chemical plays, PPG can’t be ignored.

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