Research from Water Tower Research, Water Tower Research

Water Tower Research

Water Tower Research is a leading equity research firm that provides research on micro, small and mid cap companies.

Water Tower Research was founded by Wall Street veterans after witnessing a fundamental shift in the investment research industry with the result being a declining knowledge base among investors, a lack of awareness and a shrinking pool of fundamental research being conducted on companies across the small-cap and micro-cap spectrum. The same issues are now increasingly occurring in the mid-cap space. This sea change within the investment community is impacting not only the companies themselves but also current shareholders and potential investors. With significantly less active sell-side sponsorship by Wall Street, a substantial information gap has developed between companies and various constituents in the financial community. The net result is fewer channels for insight and information to flow between companies and investors.

Research from Water Tower Research

Equity Research Firm

Thematic (Sector/Industry)

Multiple Countries / Thematic (Sector/Industry)

<h2>KEY HIGHLIGHTS</h2>
<div></div>
<ul>
<li>WTR-CMI last week.&nbsp;Last week, the broader market recovered from the previous week’s swoon, with the S&amp;P 500 posting a 2.5% return, while the broader Russell 2000 Index gained 3.3%. Our WTR-CMI index of 30 chemicals and materials technology companies outperformed both market indexes by delivering a 4.2% improvement for the week. The prior week’s culprits, lithium stocks, were last week’s winners, with ALB, LAC, LTHM, and PLL all delivering double-digit gains following the sell-off. IOSP, SCL, and PKE were the only stocks finishing the week in the red.</li>
<li>US farmers breathe a little easier.&nbsp;Following the USDA farm income projections mentioned last week, Purdue University/CME Group’s&nbsp;Ag Economy Barometer, a survey-driven measure of farmer sentiment, recovered from multi-year lows last month to reach a reading of 117 (versus 103 in the prior month). While concerns over input costs were still weighing on respondents’ minds, the summer rally in corn and soybean prices and expectations that cost increases will moderate next year were the biggest drivers of the change in sentiment.</li>
<li>Auto sales’ tepid recovery proceeding.&nbsp;New car registrations in&nbsp;Germany&nbsp;increased 3% Y/Y in August, breaking a long string of Y/Y monthly declines, as BEV sales increased 11% Y/Y.&nbsp;UK August sales&nbsp;also edged up 1.2%, driven by 35% growth in EVs. Meanwhile,&nbsp;Mexico’s auto production&nbsp;surged 31% Y/Y, driven largely by exports.</li>
<li>Electronic adhesives market growth expected.&nbsp;According to a recent report from ResearchandMarkets, the global market for&nbsp;adhesives going into electronic applications&nbsp;will increase at a 7% CAGR over the next five years to reach almost $8 billion, driven by the growth in consumer electronics, continuing miniaturization and the proliferation of electronics and the 5G roll-out. We believe this 2x global GDP growth is a positive for companies such as FUL, which have spent the last several years building out their electronic and high-performance engineered adhesives business.</li>
<li>Stepan Company expands portfolio with acquisition.&nbsp;SCL announced that it has entered into an&nbsp;agreement to acquire the surfactant business&nbsp;and associated assets of PerformanX Specialty Chemicals, LLC. The deal will bring approximately $20 million in annual sales and be accretive to the company’s EBITDA margins.</li>
</ul>
<h3>WTR-CMI WEEKLY PERFORMANCE</h3>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/297/914/original/image_70624173521663118561538.png?1663118564" class="editor-image img-responsive" data-smartkarma-image-id="297914"></figure>
<h2>Ag-Tech and Bio-Ag</h2>
<p>Chinese pesticide price data suggest more pain in 2023.&nbsp;As we mentioned above, the cost of inputs, such as seeds, fertilizers, and pesticides, are still weighing on the minds of farmers as they prepare for the 2022-23 planting season. Recent data from China, which show that&nbsp;pesticide export prices, while off their mid-summer highs, remain elevated versus 2021 levels and are still 30-40% above the year-ago period. As China is a major exporter of chemical pesticides, as well as the manufacturing hub for many pesticide procurers, this is not good news for the ag market heading into the purchasing period in the Northern Hemisphere. Furthermore, with elevated natural gas and energy costs and possible energy rationing over the winter months, conditions may be in place for price increases of inputs to resume over the next three to six months, suggesting there may be material downside to the USDA’s recent bullish outlook for farmers’ income come 2023.</p>
<p>Efforts to mitigate fertilizer price spike.&nbsp;Fertilizers, particularly nitrogen containing products such as urea and ammonia, have seen a nearly unprecedented increase in price over the past 12-18 months. With natural gas prices and availability becoming an issue in Europe, as well as in China, potentially curtailing production, fertilizer prices may continue to stay at elevated levels, if not head higher again. Furthermore, with fossil fuel sources under pressure from numerous government goals, rules, and regulations, elevated chemical fertilizer prices may become a feature of the ag market. To reduce the impact of higher chemical nitrogen costs, efforts are underway to commercialize and expand the use of bio-based nitrogen fixing products.&nbsp;In LATAM, a region that relies almost exclusively on imported fertilizers, the effort is led by microbial N-fixing solutions, using both symbiotic (microbes that interact with plant roots) and non-symbiotic organisms. It is estimated that in Argentina alone, this $100 million annual market may grow at a mid-teen CAGR. In the US, privately held&nbsp;Pivot Bio announced&nbsp;the development and introduction of on-seed microbial nitrogen for crops including corn, grain sorghum, and spring wheat. Adapting the technology of N-fixing to seed treatment may be a way to expand the use of microbial fertilizers to farmers that may otherwise not consider the option.</p>
<h2>Automotive &amp; Transportation</h2>
<p>We’re not out of the woods yet.&nbsp;Even as the new passenger vehicle market is beginning to recover from its lows, with the first positive Y/Y monthly comps since 1H21, concerns remain. Old problems, like parts and chips availability, continue to plague the industry, demonstrated by&nbsp;Honda’s recent announcement&nbsp;that it will slash output by about 40% this month at its assembly plant in Saitama prefecture, north of Tokyo, citing ongoing supply chain and logistical problems. Chip availability remains an issue, with another 76K vehicles cut from production forecast last week, mainly in North America and Europe. Is it any wonder that&nbsp;car dealers’ sentiment&nbsp;declined, according to Cox Automotive? Given the above and combined with growing economic concerns around the globe, made worse by food and energy insecurities in many parts of the world, auto production recovery to pre-pandemic levels may be delayed until 2024, suggesting continuing issues for companies in our index, such as PPG and AXTA, when it comes to volume growth and the ability to restore margins following the raw material run-up over the course of the past 18 months. We therefore advise caution and patience when investing in these stocks.</p>
<h2>Rating and Price Target Changes</h2>
<p>ALB –&nbsp;RBC raised its price target (PT) to $371 from $357 and reiterated its Outperform rating; Citigroup also raised its PT to $345 from $294 and reiterated its Buy recommendation.</p>
<p>ECL –&nbsp;NorthCoast Research upgraded the stock to Buy from Neutral.</p>
<p>HXL –&nbsp;Morgan Stanley upgraded the stock to Equal Weight from Underweight and raised its PT to $68 from $59.</p>
<p>PPG –&nbsp;Redburn upgraded the stock to Buy from Neutral.</p>
<p>SHW –&nbsp;Evercore ISI raised its PT to $285 from $270 and reiterated its Outperform rating.</p>
<h2>Recent WTR Publications and Upcoming Events</h2>
<p>Management Series Report – Loop Industries Founder and CEO Daniel Solomita (NASDAQ: LOOP)</p>
<p>Management Series Report and 2Q22 Update for Westwater Resources (NYSE: WWR)</p>
<p>Initiation of Coverage – Westwater Resources (NYSE: WWR)</p>
<h3>DISCLOSURES</h3>
<div></div>
<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>Dmitry Silversteyn, who is the writer of this report, covers the BioEconomy and Chemicals &amp; Materials Technology sectors for WTR. Mr. Silversteyn and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.</p>

KEY HIGHLIGHTS


WTR-CMI last week.&nbsp;Last week, the broader market recovered from the previous week’s swoon, with the S&amp;P 500 posting a 2.5% return, while the broader Russell 2000 Index gained 3.3%. Our WTR-CMI index of 30 chemicals and materials technology companies outperformed both market indexes by delivering a 4.2% improvement for the week. The prior week’s culprits, lithium stocks, were last week’s winners, with ALB, LAC, LTHM, and PLL all delivering double-digit gains following the sell-off. IOSP, SCL, and PKE were the only stocks finishing the week in the red.
US farmers breathe a little easier.&nbsp;Following the USDA farm income projections mentioned last week, Purdue University/CME Group’s&nbsp;Ag Economy Barometer, a survey-driven measure of farmer sentiment, recovered from multi-year lows last month to reach a reading of 117 (versus 103 in the prior month). While concerns over input costs were still weighing on respondents’ minds, the summer rally in corn and soybean prices and expectations that cost increases will moderate next year were the biggest drivers of the change in sentiment.
Auto sales’ tepid recovery proceeding.&nbsp;New car registrations in&nbsp;Germany&nbsp;increased 3% Y/Y in August, breaking a long string of Y/Y monthly declines, as BEV sales increased 11% Y/Y.&nbsp;UK August sales&nbsp;also edged up 1.2%, driven by 35% growth in EVs. Meanwhile,&nbsp;Mexico’s auto production&nbsp;surged 31% Y/Y, driven largely by exports.
Electronic adhesives market growth expected.&nbsp;According to a recent report from ResearchandMarkets, the global market for&nbsp;adhesives going into electronic applications&nbsp;will increase at a 7% CAGR over the next five years to reach almost $8 billion, driven by the growth in consumer electronics, continuing miniaturization and the proliferation of electronics and the 5G roll-out. We believe this 2x global GDP growth is a positive for companies such as FUL, which have spent the last several years building out their electronic and high-performance engineered adhesives business.
Stepan Company expands portfolio with acquisition.&nbsp;SCL announced that it has entered into an&nbsp;agreement to acquire the surfactant business&nbsp;and associated assets of PerformanX Specialty Chemicals, LLC. The deal will bring approximately $20 million in annual sales and be accretive to the company’s EBITDA margins.

WTR-CMI WEEKLY PERFORMANCE

Ag-Tech and Bio-Ag
Chinese pesticide price data suggest more pain in 2023.&nbsp;As we mentioned above, the cost of inputs, such as seeds, fertilizers, and pesticides, are still weighing on the minds of farmers as they prepare for the 2022-23 planting season. Recent data from China, which show that&nbsp;pesticide export prices, while off their mid-summer highs, remain elevated versus 2021 levels and are still 30-40% above the year-ago period. As China is a major exporter of chemical pesticides, as well as the manufacturing hub for many pesticide procurers, this is not good news for the ag market heading into the purchasing period in the Northern Hemisphere. Furthermore, with elevated natural gas and energy costs and possible energy rationing over the winter months, conditions may be in place for price increases of inputs to resume over the next three to six months, suggesting there may be material downside to the USDA’s recent bullish outlook for farmers’ income come 2023.
Efforts to mitigate fertilizer price spike.&nbsp;Fertilizers, particularly nitrogen containing products such as urea and ammonia, have seen a nearly unprecedented increase in price over the past 12-18 months. With natural gas prices and availability becoming an issue in Europe, as well as in China, potentially curtailing production, fertilizer prices may continue to stay at elevated levels, if not head higher again. Furthermore, with fossil fuel sources under pressure from numerous government goals, rules, and regulations, elevated chemical fertilizer prices may become a feature of the ag market. To reduce the impact of higher chemical nitrogen costs, efforts are underway to commercialize and expand the use of bio-based nitrogen fixing products.&nbsp;In LATAM, a region that relies almost exclusively on imported fertilizers, the effort is led by microbial N-fixing solutions, using both symbiotic (microbes that interact with plant roots) and non-symbiotic organisms. It is estimated that in Argentina alone, this $100 million annual market may grow at a mid-teen CAGR. In the US, privately held&nbsp;Pivot Bio announced&nbsp;the development and introduction of on-seed microbial nitrogen for crops including corn, grain sorghum, and spring wheat. Adapting the technology of N-fixing to seed treatment may be a way to expand the use of microbial fertilizers to farmers that may otherwise not consider the option.
Automotive &amp; Transportation
We’re not out of the woods yet.&nbsp;Even as the new passenger vehicle market is beginning to recover from its lows, with the first positive Y/Y monthly comps since 1H21, concerns remain. Old problems, like parts and chips availability, continue to plague the industry, demonstrated by&nbsp;Honda’s recent announcement&nbsp;that it will slash output by about 40% this month at its assembly plant in Saitama prefecture, north of Tokyo, citing ongoing supply chain and logistical problems. Chip availability remains an issue, with another 76K vehicles cut from production forecast last week, mainly in North America and Europe. Is it any wonder that&nbsp;car dealers’ sentiment&nbsp;declined, according to Cox Automotive? Given the above and combined with growing economic concerns around the globe, made worse by food and energy insecurities in many parts of the world, auto production recovery to pre-pandemic levels may be delayed until 2024, suggesting continuing issues for companies in our index, such as PPG and AXTA, when it comes to volume growth and the ability to restore margins following the raw material run-up over the course of the past 18 months. We therefore advise caution and patience when investing in these stocks.
Rating and Price Target Changes
ALB –&nbsp;RBC raised its price target (PT) to $371 from $357 and reiterated its Outperform rating; Citigroup also raised its PT to $345 from $294 and reiterated its Buy recommendation.
ECL –&nbsp;NorthCoast Research upgraded the stock to Buy from Neutral.
HXL –&nbsp;Morgan Stanley upgraded the stock to Equal Weight from Underweight and raised its PT to $68 from $59.
PPG –&nbsp;Redburn upgraded the stock to Buy from Neutral.
SHW –&nbsp;Evercore ISI raised its PT to $285 from $270 and reiterated its Outperform rating.
Recent WTR Publications and Upcoming Events
Management Series Report – Loop Industries Founder and CEO Daniel Solomita (NASDAQ: LOOP)
Management Series Report and 2Q22 Update for Westwater Resources (NYSE: WWR)
Initiation of Coverage – Westwater Resources (NYSE: WWR)
DISCLOSURES

Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.  WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.  Dmitry Silversteyn, who is the writer of this report, covers the BioEconomy and Chemicals &amp; Materials Technology sectors for WTR. Mr. Silversteyn and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.  Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.  In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.  The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.  The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.  All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.

Mat-Chem Notes for the Week Ended September 11, 2022