Commodity versus Specialty Chemical Companies

A question I have had is what distinguishes a “commodity” chemical company from a “specialty” chemical company.  Commodity and specialty are descriptions that I have seen in distinguishing chemical companies, and I have had a long-time curiosity on how the two groups of companies might be distinguished.  

One way of distinguishing the two groups might be on the basis of financial data representing the groups, and whether the financial data might indicate differences that imply company characteristics.  Therefore in this blog I am providing the tables below that show financial data associated with ten companies that are considered commodity chemical companies and ten that are considered specialty chemical companies.  I used a major investment management/brokerage company to screen their list of chemical companies based on whether the investment management/brokerage company categorizes the chemical company as commodity or specialty. And I chose ten companies from each group (commodity and specialty) and then found financial data, shown in the tables, for each company. 

 

Commodity Chemical Companies
company	p/e	% div	roe	gpm	npm	ltd/eq
AdvanSix	7.29	1.42	26.75	16.27	8.3	22.46
Dow	7.15	4.67	41.04	19.61	11.65	78.91
Hawkins	18.42	1.28	18.24	19.87	7	36.31
Koppers	7.73	0	24.08	21.03	4.88	202.47
Lyondellbasell	5.73	4.59	60.11	19.63	13.93	109.7
Methanex	7.5	1.05	34.06	24.35	12.59	164.25
Tredegar	8.9	4.21	19.77	19.81	5.35	86.82
Trinseo	7.4	2.45	34.88	14.48	5.79	227.58
Tronox	11.34	2.45	15.49	24.72	8.48	128.29
Westlake	6.82	1.12	5.46	13.63	4.4	61.74
averages	8.8	2.3	28.0	19.3	8.2	111.9
Specialty Chemical Companies
company	p/e	% div	roe	gpm	npm	ltd/eq
Ashland	39.46	1.29	4.93	31.56	7	57.19
Celanese	8.1	1.96	49.57	31.42	22.47	75.82
Chase	19.21	1.13	13.39	39.46	14.55	0
Dupont	23.42	1.76	5.41	35.13	10.83	40.22
Eastman	18.93	2.55	14.23	23.86	8.28	87.48
Element Solutions	25.55	1.37	9.62	41.35	9.62	76.52
H.B. Fuller	23.14	0.98	10.84	25.78	4.69	99.67
New Market	17.57	2.72	25.03	23.25	8.1	103.64
Quaker	23.19	0.85	11.58	35.16	8.25	60.68
Stepan	17.57	1.29	13.37	16.87	5.88	30.06
averages	21.6	1.6	15.8	30.4	10.0	63.1

 

Some of the averages for the six sets of financial data shown in the tables above differ significantly for the commodity companies compared to the specialty companies.   (The six financial data are: p/e – price to earnings ratio; % div – dividend % yield; roe – return on equity; gpm – gross profit margin; npm – net profit margin; and ltd/eq – long term debt as a percentage of total equity.) 

The average p/e for the specialty companies is significantly higher than for the commodity companies.  This probably reflects a higher expected return for the specialty companies by owners of specialty companies (e.g., the stockholders).  This is consistent with my understanding that specialty companies seek out unique products that can be protected on intellectual protection grounds, e.g. patents, which hopefully provide higher returns to the owners, and therefore a higher price to become an owner (a higher p/e). 

Significant differences also exist in the % div and the roe averages for the two categories, with commodity companies having the higher averages.  My understanding for this is that the commodity companies need to provide evidence of returns in a way other than the expected returns based on protected products, associated with specialty companies (see above paragraph for more on protected product returns).  And therefore commodity companies seek to manage their companies to show the higher % div and roes. 

The large difference in gpm between the two groups follow from the protection provided the specialty company products that allow the specialty companies to ask higher prices (less product competition) at a cost of sales that allows for a higher gpm.  The higher average gpm for the specialty companies lead to the higher average npm for these companies.

The higher ltd/eq ratio for the commodity companies indicate to me that these companies have higher capital expenses and therefore they need to borrow higher amounts of capital (leading to higher long-term debt - ltd) to pay for the higher capital expenses.   This higher borrowing amount is consistent with viewing these companies (the commodity companies) as companies needing more production assets (plants), compared to specialty companies, in order to provide products (commodity products) that usually are in greater use than specialty products.   Also these companies need a lot of production assets, because in order to gain sufficient profits on the products, the companies need to achieve economies of scales.  Such economies of scales give better profits than competitors, with less economies of scales; better profits that are needed to attract more investors. 

The tables above seem to indicate that differences between commodity and specialty chemical companies show up in financial data associated with the companies.