Robert Dover, a member of the Board of Directors at Chemtura Corporation (NYSE:CHMT), directly purchased 8,700 shares of the company’s stock on November 27th at an average price of $20.04 per share. Dover now owns a little over 23,000 shares in the $2 billion market cap specialty chemicals company, so this recent purchase represented a substantial percentage increase in his exposure to the stock. At Insider Monkey, we like to track insider purchases because on average- though not always- they outperform the market (learn more about studies on insider trading). Using our database of insider filings, we can see that earlier in November another Board member, Alan Cooper, had bought a total of 220,000 shares at about $18 per share. This means that we are seeing consensus insider buying at Chemtura- something that studies of insider purchases have found to be a particularly bullish sign.
In the third quarter of the year, Chemtura’s revenue declined 4% from its levels in the third quarter of 2011. However, the company cut costs- including SGA expenses- and even with an impairment charge included earnings were flat from a year earlier. Over the first three quarters of the year net income has been down slightly, but the loss in earnings is overwhelmed by the charges in impairment and plant closure costs that Chemtura Corporation has taken. We’d expect that its numbers would be considerably better in the future as a result.
Wall Street analysts have picked up on this point as well and they expect $1.85 in earnings per share for 2013, implying a forward P/E multiple of 11. They also expect growth to continue in future years and so the five-year PEG ratio is 0.6, which normally suggests that a stock is undervalued. While we are fairly confident that there will be a near-term bump in earnings as Chemtura Corporation no longer records special charges, however, we are less certain in the longer term growth. Still, 11 times earnings is a decent price. Billionaire James Dinan’s York Capital Management cut its stake in Chemtura by 12% during the third quarter but closed September with 2.8 million shares in its portfolio (check our more of billionaire James Dinan's stock picks).
Chemtura’s peers include Albemarle Corporation (NYSE:ALB), Eastman Chemical Company (NYSE:EMN), Kronos Worldwide, Inc. (NYSE:KRO), and Cabot Corp (NYSE:CBT). Chemtura’s valuation based on forward earnings estimates actually seems in line with these other specialty chemicals companies, as their forward P/Es cluster between 8 and 12. Eastman, which is in the middle of that range, experienced a decline in its earnings last quarter versus a year earlier, but revenue rose and analysts seem to think that the company will rebound. The other three companies actually had larger declines in their net income in their most recent quarter compared to the same period in the previous year, with Kronos’s earnings decreasing by 59% for example. With Chemtura performing about even with last year, and with special charges likely to fall off the income statement next year, it therefore seems like a much safer investment than these other chemical companies. The only peer which stands out as potentially more attractive is Cabot: its forward P/E of 8 is at the lower end of the range we’d discussed earlier, and that actually captures expectations of declining earnings as the trailing P/E is only 6. It seems that expectations here are so low that the stock could respond positively to a slower rate of decline than is currently expected, but of course we’d have to research the company further before exposing ourselves to any risks.
We can see why insiders are liking Chemtura. In an industry where other companies are seeing poor business performance, the company’s flat reported earnings mask a combination of actual improvement and special charges that will likely not be repeated in the next year. As a result its earnings estimates for next year- which drive a reasonable forward P/E- seem well founded and if investors want exposure to the specialty chemicals industry Chemtura seems like a good place to start the search.