The Top 3 Chemical Manufacturing Companies of 2013

Minerals Technologies' stock price grew over 40% in the past 52 weeks, but that's nothing compared to a seller of methanol that had over 80% growth. Can they do it again in 2014?

Jan 21, 2014 at 11:27AM

While no one can predict the future, some investors are able to achieve superior returns based on fundamental investment research. In an analysis of chemical manufacturing companies with at least $2 billion in market capitalization, three companies produced superior returns last year: Methanex Corp (NASDAQ:MEOH), Rockwood Holdings (NYSE:ROC), and Minerals Technologies (NYSE:MTX) all have a 1-year price return over 40%. Let's see what gave these stocks such incredible growth in 2013, and whether or not that growth will continue into 2014.

MTX 1 Year Price Returns Chart

MTX 1 Year Price Returns data by YCharts

Methanex Corporation -- No. 1
Mathenex, a producer and seller of methanol, has a 1-year return of 87%. With a market cap of $5.8 billion, the company has operations in Chile, Trinidad, Egypt, New Zealand, and Canada. The increase in earnings was primarily due to an increase in the market price of methanol from $425 to $438 per tonne. The company produced 1.035 million tonnes in the first nine months of 2013, and sold 1.04 million tonnes, which supports the increase in demand. According to an IHS Chemical study, the global market for methanol is driven by China, which increased consumption 23% from 2010 to 2012. With this kind of demand there's little doubt the company will continue to grow in 2014.

Rockwood Holdings  -- No. 2
Rockwood Holdings, with a market cap of $5.3 billion, manufactures and markets specialty chemicals and other materials for both industrial and commercial use. The primary strength of this company is its diverse customer base -- there are many applications for what it produces, and it serves a wide range of end-users. As a result, the company grew its share price 43% in the last 52 weeks. Specifically, higher surface treatment volumes, higher automotive OEM, and higher lithium volumes contributed to the growth. Rockwood's growth potential lies in its ability to pull value out of its end-user base. .

Minerals Technologies -- No. 3
Minerals Technologies, recording sales of $1 billion, comes in with a 1-year market return of 42%. The company develops and produces specialty mineral products and support systems. Last quarter Mineral Technologies reported record operating income of $32.8 million, up 15% over 2012; EPS increased 17%. The company attributes increased sales of 3% to growth in specialty minerals, new satellite plants, and new satellite contracts. "We achieved record operating income of $32.8 million," said Robert S. Wetherbee, president and CEO. "This solid financial performance is a result of continued momentum with our two major growth initiatives-geographic expansion and new product development." Continued growth in 2014 will be dependent on the success of these growth initiatives.

Repeat performance in 2014?
Compared to sector averages, the chemical manufacturing industry is "on sale":

Chemical Manufacturing MEOH ROC MTX Industry Avg Sector Avg S&P Avg
Market Capitalization  5.8 B  5.3 B  2.0 B 14.8 B 2.3 B 35.0 B
Price/Earnings (ttm)  12.99x  90.97x  25.27x 16.8x 26.6x 18.7x
Price/Book  4.12x  2.27x  2.49x 4.2x 2.8x 26.3x
Price/Sales (ttm)  2.12x  2.86x  2.00x 1.0x 1.2x 1.6x
Price/Cash Flow  15.24x  42.49x  14.64x 8.9x 11.2x 9.7x
Return on Equity  -1.98%  3.12%  10.08% 15.16% 10.06% 14.45%
Total Debt/Equity  0.85x  0.55x  0.11x 0.7x 0.8x 0.7x
Dividend Yield  1.33%  2.48%  0.34% 2.76% 2.33% 1.95%

 Source: Morningstar & Market Edge

Methanex is poised to take advantage of the growing demand for methanol. Annual demand is expected to increase from 61 million metric tons (MMT) to 137 MMT in 2022. China's methanol consumption alone is expected to triple from 31 million metric tons (MMT) in 2012 to 97 MMT in 2022. The P/E ratio is also very attractive compared to industry peers. We'll see how the company wrapped up the year on the next earnings call, which is scheduled for January 30.
 
Rockwood's success is less dependent on the market, and more dependent on how management juggles end-markets. This is probably the most diversified company among the three, and the dividend yield is higher than the sector average at 2.48%, but higher than average price valuations are troublesome.The next earnings call is scheduled for Feb. 17.
 
Minerals Technologies, the smallest of these companies in market capitalization, also has the highest ROE at 10.08%. With less end-market diversification than Rockwood, however, the company is dependent on the growth of one segment, which is what I'll be listening for on the next conference call scheduled for Jan. 31.

The Foolish bottom line
The trend is your friend, and these three companies are the current contenders in the chemical manufacturing industry. Momentum from last year's success is a powerful thing for investors; it's also a motivating factor for executive leadership. Based on this analysis, there's no reason these three companies won't be able to repeat to post a repeat performance in 2014, but this Fool's pick is Methanex.

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Fool contributor C Bryant has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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