We reflect back on our BASF comments of last week and see Covestro falling into the same trap, by underestimating the potential slowdown in discretionary spending in Europe (and the US) and consequently putting too much hope into revised guidance. At the same time, we are not sure what would be gained by painting a picture of doom and gloom, but we would hedge much more overtly if we were offering guidance around the business outlook today.
Source: Covestro – 1Q22 Earnings Results Presentation, May 2022
By contrast we see nothing but good news for the Ag focused industries, as higher crop prices and margins are giving farmers enough cash to pay for the fertilizers and chemicals that they need to maximize output. Nutrien will be impacted in 2Q by the higher natural gas prices in the US but should be able to pass on increases as nitrogen fertilizers are in short supply. We do not see any resolution that would lower crop prices any time soon and with incremental demand for materials and fuels from crops, prices could stay elevated. In our ESG and Climate work we have identified the need for a radical new farm policy in the US and in many other nations if we are to keep food prices under control while also allowing some fuel and materials growth from crops.
Source: Nutrien – 1Q22 Earnings Result Presentation, May 2022
Lastly, another very strong quarter from Westlake and while the company benefited from the easy 1Q2021 comp (winter storm Uri), the results are highly influenced by the acquisitions last year and we are no longer really comparing apples with apples. The sequential numbers were also very strong, but some acquisition timing may have influenced the comparisons. While there was a strong building products and petrochemical backdrop behind the 1Q 2022 numbers we would not underestimate Westlake’s ability to integrate acquisitions and given the past track record we would expect to see strong synergy-based earnings contributions through the balance of the year. Readers will note that we have backed away from our “buy commodity chemicals” call over the last week, given the very strong gains through the end of April. Westlake was a preferred pick in the space and has more than doubled in value since we first highlighted the name when we founded C-MACC in early 2020. If we wanted commodity chemical exposure, Westlake would still be our preferred stock as there are more levers to pull than simply commodity demand and margins.
Source: Westlake Chemical – 1Q22 Earnings Release Presentation, May 2022
