【研究报告内容摘要】

Companies reporting solid quarterly earnings outperform in March.

US Chemicals rose 9.8% in March, vs a 6.6% rise in the S&P. Notableoutperformers were companies that posted positive quarterly results. Trinseo(TSE, +23.5%, Buy) had a strong Q4 release as EBITDA beat by 16% and ’16EBITDA guidance was raised by 5% on structural improvements in styrene,polystyrene and polycarbonate. HB Fuller’s (FUL, +10.3%, Buy) Q1 release washighlighted by solid revenue growth (ex Americas Adhesives) and broad-basedmargin improvement (total EBITDA margin +320 bps) as the companycontinues to drive performance on positive price/raw material management(maintaining price despite lower oil) and improved operations.

Companies affected by challenging Ag conditions underperform.

Notable underperformers in March were companies that are being negativelyaffected by the weak agricultural market (low commodity prices, reducedspending by farmers, aggressive seed discounting) and FX headwinds, namely,Mosaic (MOS, +2.3%, Hold), Compass Minerals (CMP, +4.5%, Hold) andMonsanto (MON, -2.5%, Buy). Given that Monsanto is the most profitable Agcompany in the world, we believe it is in a better position than its peers toinvest in R&D and new product platforms through the current downturn. At18.3x ‘16E EPS, we reiterate Buy.

Trinseo’s Q4 beats. ’16 guidance raised.

Excluding inventory revaluation and $60MM in benefits from unplannedstyrenic outages in ’15, Trinseo’s ’16 EBITDA guidance is up $25MM, or 5%,YoY (midpoint) with $15MM from Performance Mat’ls (+5% YoY) and $10MMfrom continued structural improvement in Basic Plastics & Feedstocks(styrene, polystyrene and polycarbonate). The long-term outlook for styrenechain margins remains strong given 2% demand growth and limited capacityadditions for the next 3-4 years. In Performance Mat’ls, Trinseo expectsgrowth to be driven by i) cost actions and price increases in Latex, ii) modestgrowth and lower raw materials in Performance Plastics, iii) continued strongvolumes in Synthetic Rubber driven by high performance tires.

Sherwin-Williams agrees to acquire Valspar for $113/shr.

We believe Sherwin-Williams’ agreement to acquire Valspar for $113/shr incash, or $11.3B, and a 35% premium to Friday’s close, represents a full andfair purchase price for this US architectural and industrial coatings company.

Sherwin is targeting synergies of $280MM, of 6.4% of Valspar’s ‘16E sales.

The transaction is expected to close by the end of Q1’17. Based on ourconsensus ‘16E EBITDA of $745MM, Sherwin-Williams is paying 15.2x ‘16EEBITDA and 14.3x ‘17E EBITDA. Given the small universe of paint companiesand Valspar’s long-term status as an acquisition target, we suspect all majorcoatings companies were involved in the acquisition process and that Sherwinwas the highest bid. As such, we do not expect another bidder to emerge. Toreflect the agreed acquisition price between Sherwin and Valspar we raisedour price target to $113 from $92 and downgraded Valspar to Hold from Buy.

Valuations look reasonable, but macro weakness may limit upside.

Today’s 16.6x fwd P/E multiple for US Chemicals (ex-ag) is 13% above the 10-yr avg. of 14.9x. We view US Chemicals trading at a 0.9% premium to the S&P500 vs. a 10-yr avg. of a 4% discount as unwarranted given structurally low USethane prices.