Surfactants play a vital role in everyday products, from detergents to industrial cleaners. Stepan Company (SCL), a leading surfactant producer, saw its profitability drop as rising inflation increased costs and customers cut back on orders and inventories. Despite this slowdown, the demand for cleaning chemicals and insulation remains steady, suggesting a potential rebound. In today’s FA Alpha Daily, we explore whether Stepan can recover as economic conditions stabilize.
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Surfactants play a vital role in everyday tasks, from washing dishes to shampooing hair. By lowering surface tension, they help water mix with oils and dirt, making cleaning more effective.
Though they often go unnoticed, surfactants show up in products ranging from dishwashing liquids and laundry detergents to ice cream and cosmetics, stabilizing mixtures and creating foam or smooth textures.
Their impact goes beyond household items. The same science that keeps clothes fresh in the wash also powers large-scale operations like enhanced oil recovery and the formulation of complex pharmaceuticals.
Because they solve so many challenges linked to cleaning and emulsification, surfactants remain key ingredients for many industries.
Stepan Company (SCL) is a specialty chemicals maker known mostly for its surfactant.
Though it also produces polymers and other specialty items, the core of Stepan’s business comes from these cleaning chemicals.
The company supplies these chemicals to a wide range of customers, including large consumer product brands and industrial manufacturers.
Over the past few years, the surfactants segment has grown because of a steady demand for cleaning products. Households, factories, hospitals, and other settings all use these products daily.
However, the last year brought a change in market conditions. Inflation made raw materials more expensive, while many of Stepan’s customers also trimmed their inventories.
Retailers and manufacturers didn’t want to keep more stock than they could sell quickly, given higher costs and uncertain spending by consumers.
As a result, Stepan saw a noticeable drop in orders. It wasn’t that demand for cleaning products vanished; rather, customers worked through their extra stock instead of buying more right away.
This resulted in the company’s Uniform return on assets ”ROA” to fall sharply to 1% last year from around 5%.
Stepan’s second-biggest business is its polymer segment. These polymers are used in foam insulation materials, adhesives, and some coatings.
Construction and industrial markets depend on these materials for better energy efficiency in buildings and for various specialized applications.
Like surfactants, the polymer segment also felt the effects of inflation and slower purchasing by customers.
However, the demand for high-quality insulation materials remains important, especially as many industries and governments aim to reduce energy waste in buildings and factories.
Because of this, Stepan’s polymers could see a boost once the economic environment stabilizes.
Another slice of the company’s portfolio is its smaller specialty products unit. This part of the business involves chemicals used in food, beverages, and nutritional supplements.
While this area isn’t as large as the others, it adds diversity to Stepan’s overall offerings. It also benefits from trends in consumer health and well-being, which keep up a regular demand for certain nutritional ingredients.
Still, the overall performance of this segment is tied to broader consumer trends and may face short-term dips if people cut back on non-essential items.
Despite the recent slowdown, the market sees signs of a possible rebound, but not prices in a full recovery.
We can also see this through our Embedded Expectations Analysis (“EEA”) framework.
The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.
In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.
At the current stock price, the market predicts that the company’s ROA will be 3%, far from a full recovery.
The core need for cleaning chemicals and insulation won’t disappear. If inflation cools down and customers start restocking, Stepan could quickly see its sales move closer to past highs.
The company has a long history of producing these chemicals efficiently, and its business setup is difficult to replicate.
Stepan’s focus on surfactants, polymers, and specialty ingredients requires specific know-how, facilities, and customer relationships.
The day-to-day nature of cleaning product demand suggests that the slowdown caused by inventory adjustments should ease over time.
If that happens and material costs become more stable, Stepan’s profitability may improve and achieve the levels it had before inflation surged.
Best regards,
Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research
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