Massive new supplies of natural gas discovered in the U.S. have caused the domestic price to fall as much as 70% below the price paid in other countries. While these low prices have not been favorable for the operating results of the businesses selling natural gas, it is creating a windfall for businesses that are big consumers of it: But the big profits for investors will come from the companies that help them expand.
Feedstock for chemical companies
Big chemical companies like The Dow Chemical Company (NYSE:DOW) and E I Du Pont De Nemours And Co (NYSE:DD), commonly known as DuPont, are businesses that use natural gas as feedstock for their products, and are reaping the benefits of low domestic gas prices. These two well-known industry names should both continue to prosper as domestic gas prices remain low and they continue to expand their domestic production, but one of the two currently carries a lower valuation based on current fundamentals and forward projections.
Both The Dow Chemical Company (NYSE:DOW) and E I Du Pont De Nemours And Co (NYSE:DD) trade at P/E multiples slightly less than 14.5 times 2013 estimated earnings but DuPont has a 5-year projected earnings growth rate of 8.4% per year versus on 6.4% per year for The Dow Chemical Company (NYSE:DOW). Furthermore, with a dividend payout rate of 160%, The Dow Chemical Company (NYSE:DOW) is much more strained to maintain their current 3.71% yield than DuPont appears to be with a their current payout of 68% which is producing a current yield of 3.25%. Additionally, while The Dow Chemical Company (NYSE:DOW)’s dividend has decreased at an annualized rate of 5.84% over the past 5 years, E I Du Pont De Nemours And Co (NYSE:DD)’s dividend has been growing at 2.26% per year.
Considering the comparable valuations across other key metrics, the superior forward growth rate projections for E I Du Pont De Nemours And Co (NYSE:DD)’s earnings, and the lower payout ratio required to cover the current dividends, E I Du Pont De Nemours And Co (NYSE:DD) appears to be a more attractive candidate for investment at this time over The Dow Chemical Company (NYSE:DOW). Adding the current dividend yield to the projected earnings growth rate provides for an anticipated annual return of 11.65%, almost exactly even with the P/E ratio of 12.81 times 2014 earnings.
Less risk equals bigger gains
When seeking investment opportunities within any given sector, I always try to explore profitable opportunities within peripheral industries where the trend from which I am seeking to profit is certain to cause sustainable growth but where the business valuations do not yet reflect that inevitable outcome. One of the peripheral areas where low priced natural gas will have this affect is in the businesses involved in constructing and expanding chemical and plastics plants. This is an industry requiring a great deal of specialized expertise, providing a high bar to entry, and one where the current business valuations do not yet seem to reflect the coming increase in demand for their services as more producers within the chemical industry open new facilities in the U.S. and undertake large expansions of their existing facilities..
KBR, Inc. (NYSE:KBR) and Fluor Corporation (NEW) (NYSE:FLR) are two industrial construction and engineering businesses that specialize in the hydrocarbon, chemical and petrochemical industries and are poised to produce exceptional gains for investors who allocate capital today when the broader market comes to recognize the full potential impact that cheap domestic prices for natural gas will have on the demand for the services these businesses provide. Even though I believe the current analysts’ projections for both of these businesses fail to adequately reflect the current growth prospects, the businesses are very fairly priced even compared to the existing projections.
KBR, Inc. (NYSE:KBR) has been adding new business at a breakneck pace since the first of the year against an already solid backlog and this demand shows no signs of abating in the near future given the business’ exceptional prospects for additional new contracts over the next 7 to 10 years as the driving trend of low gas prices continues.