Stocks of basic materials seem expensive

The Morningstar US Basic Materials Index outperformed the overall market in the fourth quarter of 2021 by around 460 basis points. The excess return in the fourth quarter caused the basic materials sector to outperform the market by almost 310 basis points over the past 12 months. We see limited opportunities in the industry with a few undervalued names traded in 4-star territory, but none traded in 5-star territory.

Global Materials Index vs. Global Equity Index


Source: Morningstar analysts

Most materials stocks trade near or above their fair value estimates

Source: Morningstar analysts

Lithium is one of the best ways to invest in greater adoption of electric vehicles, as all electric vehicles need batteries and all electric vehicle batteries require lithium as an energy storage component. As demand for lithium outstrips the ramp-up of the new supply, we expect prices to remain high for the next several years. Over the long term, we expect lithium carbonate prices to be $ 12,000 per metric tonne, below current prices but above recent cyclically low levels in 2020.

We forecast lithium prices in the long term below current spot prices

Source: Morningstar analysts

Air Products makes major investments in blue and green hydrogen

Source: Morningstar analysts

Industrial gas companies are well positioned to cope with inflation and volatile energy prices. Industrial gas producers have resilient business models, particularly in on-site activity, which benefits from long-term customer agreements with outright purchase clauses, inflation-indexed prices and pass-through mechanisms. energy costs. In the long term, we also see upside potential for hydrogen, as we expect industrial gas companies to participate in the full spectrum of hydrogen production (including gray, blue hydrogen and green) and distribution (including trucks, pipelines and shipping).

We see long term growth for specialty chemical producers who sell to electronics end markets. As 5G and ‘Internet of Things’ technologies require more advanced semiconductors and electronic components, specialty chemicals should be able to sell more content per device, driving revenue growth at an average annual rate. medium to high single digit.

Best choices
From the Pont de Nemours (not a word
)
Star rating: ??
Economic moat assessment: narrow
Fair value estimate: $ 96.00
Uncertainty of fair value: average

Our first choice to meet the growing demand for specialty chemicals is DuPont Narrow Gap. The stock is trading at a discount of almost 20% from our estimate of fair value of $ 96 per share. DuPont has invested heavily in its electronic materials business. The company acquired Laird Performance Materials in July and plans to acquire Rogers Corp. next year. The company also plans to divest the majority of its mobility and materials portfolio. This should allow the end electronics market to generate the majority of profits in the future. In its historic water and protection business, DuPont is also expected to benefit from the growth in housing starts in the United States. We see the current share price as an attractive entry point for the producer of quality specialty chemicals.

Lithium Americas (LAKE)
Star rating: ??
Economic moat assessment: narrow
Fair value estimate: $ 98
Uncertainty of fair value: average

Lithium Americas is our first choice to meet the growing demand for lithium resulting from the increased adoption of electric vehicles. The stock is trading at a discount of over 35% from our estimate of fair value of $ 45 (CAD 57). Lithium Americas does not currently produce any lithium but is developing three lithium resources that are expected to go into production by the end of the decade. Once all projects are fully deployed, we expect the company to become one of the world’s top five producers in terms of capacity. We reiterate our very high uncertainty rating on the name. However, for investors who can tolerate volatility, we see the current share price as an attractive entry point for the company.

Air products and chemicals (APD)
Star rating: ??
Economic moat assessment: narrow
Fair value estimate: $ 340
Uncertainty of fair value: average

Air Products is our preferred choice in industrial gas. The stock is currently trading in 4-star territory at a discount of over 10% from our estimate of fair value of $ 340 per share. We believe Air Products has become a leader in clean hydrogen with the recent announcements of several multi-billion dollar blue and green hydrogen megaprojects. We expect these new investments will fuel strong growth, helping the company more than double its EPS over the next five years.


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