According to a filing with the SEC, Steadfast Capital Management has acquired a total of 7.2 million shares of PetroLogistics LP (NYSE:PDH), representing just over 5% of the total shares outstanding. PetroLogistics is a $1.6 billion market cap company which processes propane into propylene (a raw material whose supply is critical to the petrochemical industry). The company IPOd in May, with the stock falling 30% in what has been roughly a six month period of public trading. Our database of 13F filings shows that, as of the end of June, Steadfast (which is managed by Robert Pitts) was one of a small number of hedge funds and other notable investors with a position in the company; it had 4.8 million shares in its portfolio at that time. Find more stocks that Steadfast owned.
PetroLogistics LP recently released its results for the third quarter of 2012. While revenue was down 7% from the third quarter of 2011, and gross profits were actually up, sizable losses on derivatives contributed to a sharp decline in net income. The company has lost a considerable amount of capital on derivatives throughout the year. Sell-side analyst consensus for 2013 is that the company will earn $1.41 per share, which given the current stock price places the valuation at only 8 times forward earnings estimates. Certainly, in order to hit this target PetroLogistics would have to start curbing its derivative-related losses, and we’re not sure how to evaluate its chances of doing so. Pitts and his team at Steadfast, however, seem confident that even if it does underperform those numbers it will not be by much.
The chemicals industry has been seeing other actors invest in the last couple months: Atlantic Investment Management has taken on a position in Rockwood Holdings, Inc. (NYSE:ROC) and there has been insider buying at Air Products & Chemicals, Inc. (NYSE:APD). Read our articles on investments in Rockwood Chemical and in Air Products & Chemicals. Currently, these companies trade at moderate premiums to PetroLogistics LP on a forward earnings basis: their P/Es are 11 and 12, respectively. Of course, these companies have also been generating profits and are considerably larger in terms of market cap. However- like many companies in the chemicals industry, and as we’ve seen at PetroLogistics- their businesses have been performing poorly in the past few quarters. Rockwood reported an 8% decline in revenue and a 19% decline in net income in the third quarter versus a year ago, while Air Products & Chemicals experienced a 57% drop in earnings despite sales holding up fairly well. We do think that either of these companies would be a better buy than PetroLogistics despite carrying slightly higher pricing.
We can also compare PetroLogistics to Methanex Corporation (NASDAQ:MEOH) and PolyOne Corporation (NYSE:POL). These peers are clustered in the same P/E range as those we’ve already discussed: slightly higher than where PetroLogistics trades (and, again, these companies actually offer positive earnings). They are also interesting in that their recent revenue numbers haven’t been particularly bad, and PolyOne actually defied industry trends with an 11% increase in earnings in the third quarter compared to Q3 2011. These relatively stronger companies are easily outperforming the S&P 500 over the last year; we think that they may be better choices to look at than PetroLogistics as well.
PetroLogistics looks cheap on a forward earnings basis, but in the last couple quarters the company has not been performing well. If its derivative losses stop being such a problem, than the stock will look like a good value but we aren’t as confident as Steadfast that that will be the case.