My Chemical Romance Part III: Going Niche with AdvanSix Inc $ASIX

There aren’t too many cheap sectors at the moment; Restaurants, Chemicals, Energy, Real Estate, Healthcare, and Software is about all I can find right now. Chemicals are particularly contentious, because China is building out an enormous capacity which will no doubt suppress margins. You can see the magnitude of the capacity buildout below.

I am not convinced that this is the end of the story, however. For one thing, within chemicals there is still a value chain, and just as Adam Smith plagiarized from Ibn Khaldun, the value of the watch spring is almost entirely divorced from the value of the underlying commodity. Just because China is participating in a commodity does not mean that all industrial processes that use those commodities will see profits go to zero. For those of you who bought Rayonier Advanced Materials (RYAM) after my writeup, that stock doubled and it was a notoriously terrible industry, paper mills. But it was a paper milling company that focused on more technologically advanced niche products.

I also find it interesting that Warren Buffett just bought the Chemicals portion of Occidental Petroleum for $9.7 billion in cash. If only one person in the world agrees with me on a thesis, I would find my confidence bolstered if it were him. Chemical outputs tend to be low value per unit weight or volume, making them inefficient to transport, and no matter how much capacity China builds, it doesn’t necessarily mean that it makes economic sense to put petrochemicals on a ship and send it through the Panama Canal to Alabama. China might have cheaper electricity than the US, but they also have more expensive feedstocks, and now they have to contend with tariffs as well.

AdvanSix Inc (ASIX), the 2016 spinoff from Honeywell, is a chemicals company based out of New Jersey with 97% of sales to North and South America, and 98% of raw material produced in the US. ASIX is in a similar market position to RYAM, farther up the value chain and with a focus on niche products that are unlikely to suffer from Chinese competition. If anything, their primary competitor is BASF, the German chemical giant who single-handedly consumes over 1% of Germany’s very expensive electricity. With US electricity still about 1/3rd the cost of Germany’s, ASIX is in a position to benefit and continue taking market share.

There are no large influential shareholders or significant insider buying at ASIX, it is a mature company susceptible to the standard problems of American corporate culture. As a petrochemical company, it has been wrestling with ESG requirements. They have a carbon capture program that may capture as much as $10 million a year in carbon credits, and their green chemicals may be preferred by American companies who have similar requirements imposed on them by Larry Fink.

ASIX has two major categories of products: Ammonia fertilizer, Nylon 6, as well as the sale of the intermediary products of both production lines.

Ammonium Sulfate fertilizer in strong years can be one third of ASIX’s revenue. That gives AdvanSix exposure to agricultural cyclicality, which is currently in a down cycle. But if agriculture has a strong year, even if the rest of the chemicals complex is depressed, ASIX could outperform the chemicals sector due to its agricultural exposure. Trump is also particularly protective of American agriculture, and has implemented many import tariffs on foreign fertilizers.

Nylon 6 is high performance engineering thermoplastic, and a large portion of ASIX’s output is used for residential construction and in the automotive industry. This makes AdvanSix a much more interest rate sensitive company than a typical chemicals business. And Trump gets to choose a new Fed chair in May. Nylon 6 is also used in food packaging and adhesives, but cyclicality is what allows us to try and capture a multiple re-rating.

This means that AdvanSix has two potential catalysts for a multiple re-rating, either the agricultural cycle, or the interest rate cycle.

Chemicals are currently in the down part of their cycle, and when any cyclical is in the down part of their cycle, there are questions about permanent obsolescence, but I maintain that transport costs and tariffs are enough to prevent China from destroying ASIX. In 2022 when home building, automotive, and agriculture were all strong, ASIX had $273 million of operating cashflow. Capex usually runs between $100 million and $130 million annually. In 2024 under weaker cyclicality, operating cash flow was only around $135 million. Management is guiding for 2025 to be free cash flow positive, with operating cash flow greater than capex, but just barely. At a market capitalization of $526 million, ASIX is priced at less than 2x peak operating cashflow, or at about 4x peak free cash flow. The debt position is light enough and the pricing power strong enough to be free cash flow positive even for 2025, a year with weak home building, automotive sales, and agricultural demand. From a risk standpoint, it is nice to not be losing money at the trough of a cycle.

From a reward standpoint, AdvanSix currently trades at a price to sales ratio of 0.35x. At past cycle peaks, it was able to reach between 0.75x and 0.85x price to sales. In 2022 when agriculture, automotive, and homebuilding were all strong, revenues were $1.966 billion. For the trailing twelve months, revenues were $1.515 billion. The payout policy is an even split between share buybacks and dividends, except for years when earnings are abnormally large, and then extra free cash flow is set aside for debt retirement or for emergencies. If it takes a couple of years for the chemicals sector to rebound, ASIX will probably shrink the float by another 3% per year, while paying about a 3.5% dividend yield at their current share price of $19.60.

If 2027 were a strong year for AdvanSix due to the effects of interest rate cuts from the new Fed chair, a return to past peak revenue and a price to sales ratio of 0.75x would imply a share price of $59.45 after the effects of share buybacks. Even a return to the past peak share prices would be over $45.

There is a possibility of a much faster return, however, because Trump’s Big Beautiful Bill allows for extremely accelerated depreciation, as much as 100% in the first year in certain cases. Due to this accelerated depreciation, ASIX will have strong 2026 free cash flow, even if prices of fertilizer and nylon 6 stay depressed. If quantitative strategies aren’t prepared for it, there might be a large pool of money systematically allocated to capital heavy industries such as chemicals due to the sudden growth in free cash flow. Of course, if Republicans were to lose their majority, a reversal of that rule would cause free cash flow to collapse again across many industries.

The potential return from ASIX is a greater than potential return from my price target for Lyondell Basell, but with a smaller dividend. Again, it is possible that LYB’s dividend will be cut due to recent debt covenants. Orion also has the potential to triple on a return to $20 after the recent share price collapse; it is probably the lack of a compelling dividend that has allowed OEC’s share price to collapse so sharply. OEC has more exposure to growth industries as high purity carbon black is used in semiconductor manufacturing, but ASIX is almost completely American.

Of the three chemical companies, I do like ASIX’s exposure to the agricultural cycle as well as their position almost exclusively within the US. I find the risk / reward balance very attractive, it probably can’t do better than a triple in the medium term, but given their low debt level, they aren’t likely to go out of business any time soon.

AdvanSix Inc (ASIX) $19.60: $59.45 by the end of 2028