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number cruncher

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Mr. Bowman is a portfolio manager at Hamilton-based Wickham Investment Counsel Inc., an adviser to high net worth clients. michael@wickhaminvestments.com

What are we looking for?

The North American chemicals industry is expected to see strong growth in 2013 as energy prices drop as a result of record growth of shale gas production.

Ethane, a natural gas liquid derived from shale gas, is commonly used as a feedstock by chemical companies, and having a larger supply at a lower cost will give North American companies an advantage over foreign competitors that rely on more expensive oil-based feedstock.

An astounding 96 per cent of all manufactured goods are in some way affected by chemical-related products, according to the American Chemistry Council.

Today, my colleague Rob Belanger and I take a closer look at the major players in the North American chemical industry.

The screen

These companies are sorted based on market capitalization, and all are over $500-million.

The enterprise value to EBITDA (earnings before interest, taxes, depreciation and amortization) is used to measure the value of a company. This multiple is capital-structure neutral and can therefore be used to compare companies with different levels of debt. We are looking for a low number.

We are looking for a low price-to-book ratio (PB), and a low price-earnings ratio. The earnings per share column is based on analysts' estimates over the next 12 months.

The operating margin shows what portion of revenue is left after a company pays its fixed costs, including items such as the interest on any debt. It indicates how much a company makes on each dollar of sales.

What did we find?

E.I. du Pont de Nemours & Co. was founded in 1803 as a gunpowder manufacturer. DuPont invented Mylar, Kevlar and Freon, to name just a few products. Sales growth in the past year was negative, as was the operating margin.

Toronto-based Chemtrade Logistics produces sulphuric acid and it too has negative sales growth, but the highest yield on the screen. Boston-based Cabot Corp. has a respectable EV/EBITDA, P/E and P/B. The estimated EPS growth and sales are better than average, and the operating margin is acceptable.

Missouri-based Olin Corp. has the highest sales growth and is better than average in all categories except earnings per share. It is North America's largest supplier of chlorine and industrial bleach, and also owns arms manufacturer Winchester.

Conclusion

It appears that chemical companies are planning for a bright future and their managements are optimistic that natural gas prices will remain low for years to come.

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