Responding to a question from a Member of his Inner Circle, Pat McKeough takes a look at a Canadian growth stock that it is the leader in its field. Methanex Corp. is the largest supplier of methanol in the world. Methanol is used in a variety of products and is increasingly blended with gasoline and other fuels, or used as a fuel on its own. While Methanex raised its production in the most recent quarter, its revenue and earnings fell along with the selling price of methanol. Pat balances a relatively optimistic long-term outlook for methanol against a slower global economy—especially in China—that could lower demand in the near term.

Q: Hi, Pat: I would appreciate your advice on Methanex. Thanks.

 A: Methanex Corp. (symbol MX on Toronto; www.methanex.com) is a Vancouver-based methanol producer and distributor. It’s the world’s largest methanol supplier, with an estimated 15% market share.

The company produces 70% of its methanol in New Zealand and Trinidad (where it holds a 63.1% stake in Atlas Methanol). It makes a further 18% in the U.S., 7% in Medicine Hat, Alberta, 4% in Chile and 1% in Egypt. Methanex also resells methanol produced by others.

Methanol is usually made by mixing natural gas with steam, then putting the resulting gas mixture through a liquid conversion and distillation process to create pure methanol, a clear, liquid hydrocarbon that is water-soluble and biodegradable.

A range of products include methanol, such as windshield-washer fluid, plastic bottles, wood floors, paint, silicone sealants and synthetic fibres. It is also sometimes blended with gasoline and is increasingly added to other fuels, such as biodiesel and dimethyl ether, a gaseous fuel used for cooking and heating in Asia. Methanol is also used as a fuel on its own.

Growth stocks: China accounts for over 40% of global methanol consumption

In the three months ended September 30, 2015, the company’s methanol production rose 4.6%, to 1.26 million tonnes from 1.20 million tonnes a year earlier. However, Methanex’s average selling price fell 17.0%, to $323 a tonne from $389 (all amounts except share price and market cap in U.S. dollars).

As a result, revenue declined 27.8%, to $527.0 million from $730.1 million. Overall earnings fell 54.9%, to $23 million, or $0.26 a share, from $51 million, or $0.56 a share.

Methanex’s $1.5 billion of long-term debt is a manageable 31% of its market cap. It also holds cash of $426.7 million, or $4.73 a share.

The company recently raised its quarterly dividend by 10.0%, to $0.275 a share from $0.25. The new annual rate of $1.10 yields 2.6%.

Methanex will probably earn $1.21 a share for all of 2015, and the stock trades at a somewhat high 33.4 times that estimate—but its earnings could jump to $3.05 a share next year on higher production from the company’s plants and higher prices. The stock trades at just 13.3 times that forecast. 

However, next year’s earnings forecast could prove overly optimistic. China accounts for over 40% of the world’s methanol consumption, and its slowing economy could lower demand and prices.

Longer term, the outlook for methanol remains sound. That’s mainly because more countries are mandating greater use of the chemical in fuels. Even so, the methanol business is known for its cycles of oversupply and low prices followed by periods of shortage and rapidly rising prices.

Methanex is okay to hold, but for aggressive investors only.

Inner Circle recommendation: HOLD for aggressive investors.

For a recent report on a Canadian company that we rate as a leading growth stock, read  Canadian tech stock CGI Group delivers on ambitious growth strategy.

For our advice on making the most profitable selections in growth stocks, read How to make better growth stock picks.