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The Dow Chemical Company (DOW), E I Du Pont De Nemours And Co (DD), KBR, Inc. (KBR): Big, Low-Risk Profits From Natural Gas In An Unexpected Place

The Dow Chemical Company (NYSE:DOW)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.

KBR, Inc. (NYSE:KBR) is currently trading at a P/E ratio of only 9.97 times projected earnings for 2014 but carries a 5-year projected earnings growth rate of 12% per year. While the dividend yield at present is only 1.01%, at a payout ratio of 25%, there is plenty of room for future increases in the dividend. The company carries almost no long-term debt with a debt to equity ratio of 0.03 providing investors with little reason for concern regarding the viability of the business. This is a business you can own and sleep very peacefully at night while their capital appreciates in step with the 12% earnings growth rate at KBR, Inc. (NYSE:KBR).

Fluor Corporation (NEW) (NYSE:FLR) currently has projects underway on 6 continents around the globe and is truly one of the giants in the commercial and industrial project services arena with its $10.08 billion market capitalization. Due to its already large scale, most would not be surprised to see it having lower projected growth rates for forward earnings; but you would be mistaken if you had that expectation. The current analysts’ consensus earnings growth estimates for Fluor Corporation (NEW) (NYSE:FLR) over the next 5 years currently sit at 12.7% per year and the P/E ratio based on 2014 earnings estimates is only slightly higher at 13.26. With an existing strong presence in the growing, resource driven economies of Australia, South America, and Southeast Asia, Fluor is superbly positioned to profit not only from cheap natural gas in the U.S. but from global growth and development as well. Investors in Fluor today should be able to place a great deal of confidence that the share price will grow at a pace at least equal to the future earnings growth rate over the next 5 years.

Final thoughts

E I Du Pont De Nemours And Co (NYSE:DD) appears to offer an excellent opportunity for double digit total returns on invested capital in the range of 10% to 12% per year over the long term for investors who act now. KBR, Inc. (NYSE:KBR) and Fluor are both poised to return 12%-14% per year but the gains will tend to be more heavily driven by capital gains and less direct dividend income than the gains from DuPont and will provide diversity across a broader range of industries. All three are compelling long term opportunities at this time.

The article Big, Low-Risk Profits From Natural Gas In An Unexpected Place originally appeared on Fool.com and is written by Ken McGaha.

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