Materials: Six A-Grades and Six Total Failures

A Sector Split Down the Middle

The materials sector doesn't do subtlety. Of the 16 companies we analyzed, six earned an A-grade. Six earned an F. Only four landed somewhere in between. This isn't a sector with a tail of underperformers pulling down the average. This is a sector where half the companies are generating excellent cash flow and the other half are actively destroying it.

The median FCF margin sits at 9.1%, which places materials in the middle of the pack relative to other sectors. But that median hides the real story. CF Industries is printing cash at a 29.5% margin while Air Products is burning through it at negative 31.3%. That's a 6,000 basis point spread between the best and worst performer. You don't see that kind of divergence in stable sectors.

The Winners: Chemicals and Gold

CF Industries sits at the top with a 29.5% FCF margin, nearly triple the sector median. The fertilizer producer benefits from structural advantages in nitrogen production, low natural gas input costs in North America, and global food demand that doesn't disappear in a recession. The grade is an A. The trend is stable. The business prints cash regardless of what the broader market is doing.

Newmont takes second place at 15.8% with an improving trend. Gold miners typically carry heavy debt loads and volatile margins. Newmont bucks that pattern. The company restructured its portfolio over the past few years, divesting lower-quality assets and focusing on tier-one mines with better economics. The result is a margin that would earn a B-grade in most sectors but qualifies for an A here.

Linde rounds out the top three at 14.9%. Industrial gases might sound boring, but boring works when you're selling a product with inelastic demand and long-term contracts. Linde's customers can't just stop buying nitrogen and oxygen because the economy softens. The company operates with pricing power and capital efficiency most materials companies would kill for.

Ecolab and DuPont both sit above 11%, both with A-grades. Ecolab's cleaning and sanitation business benefits from regulatory tailwinds and sticky customer relationships. DuPont's electronics and water solutions segments generate better margins than the legacy chemical operations the company used to carry. Both are improving their cash generation year over year.

Corteva deserves a mention here. A 9.2% margin doesn't look exceptional on the surface, but it earns an A-grade because the trend is improving and the balance sheet is clean. The agricultural chemicals business faced headwinds from lower crop prices, but the company kept generating positive cash flow through the cycle. That consistency matters.

The Failures: Capital Intensity Without the Returns

Air Products sits at the bottom with a negative 31.3% FCF margin. The company is in the middle of a massive capital spending cycle, building new hydrogen and industrial gas facilities. The investments might pay off eventually, but right now the cash outflows are staggering. The trend shows as improving, which means the worst of the spending might be behind them, but an F-grade is an F-grade.

Albemarle, the lithium producer, sits at negative 18.3%. The company built out production capacity to meet EV battery demand just as lithium prices collapsed. Revenue fell, but the fixed costs of new mines and processing facilities didn't. The result is negative cash flow despite operating in a commodity the market claims to desperately need. The trend is improving, but improving from a terrible baseline still leaves you in terrible territory.

Dow Inc. sits at negative 3.6% with a declining trend. The diversified chemical giant can't seem to get its cost structure in line with revenue. Commodity chemicals face brutal competition and thin margins in the best of times. These aren't the best of times. The trend direction matters here: other companies at the bottom are digging out, Dow is digging deeper.

Mosaic, another fertilizer producer, manages only a 0.4% margin. CF Industries, in the same business, generates 29.5%. That gap tells you everything about execution and asset quality. Mosaic operates older facilities with higher input costs. The company faces the same end market demand as CF but can't convert it into cash flow. The declining trend suggests the gap is widening.

PPG Industries rounds out the bottom five at 4.4% with a declining trend. The coatings manufacturer operates in a mature market with pricing pressure and rising input costs. Volume is flat, pricing power is limited, and the cash flow reflects it.

What the Trend Breakdown Suggests

Eight companies show improving trends. Four are stable. Four are declining. That 8-4-4 split looks balanced until you map it against the grade distribution. Three of the four declining companies are F-grades. The fourth is IFF, another F-grade sitting at 5.2%.

The improving trends cluster at the extremes. Half the A-grades are improving. But so are half the F-grades. Air Products and Albemarle are both improving from catastrophic starting points. Newmont and DuPont are improving from already strong positions. Those are not the same story.

The stable companies are the interesting ones. CF, Linde, Ecolab, and VMC all maintain their margins without much movement up or down. In a cyclical sector like materials, stability often signals structural advantage. These companies aren't riding a commodity price wave. They're generating consistent cash regardless of the cycle.

Debt Tells the Real Story

The sector average debt-to-FCF ratio sits at 14.4x. That's high, but the number hides significant variation. Companies like CF and Linde carry minimal debt relative to their cash generation. Companies like Air Products and Albemarle are leveraged to levels that would trigger automatic downgrades in our grading system.

Debt amplifies returns in good times and destroys value in bad ones. The materials sector is capital intensive by nature, but the best performers figured out how to grow without levering up. The worst performers are still learning that lesson.

A Sector That Rewards Selectivity

Materials as a sector isn't broken. It's bifurcated. Six companies are executing at a high level, generating double-digit margins and clean balance sheets. Six companies are burning cash with no clear path to profitability. The middle barely exists.

For investors, this creates opportunity but demands selectivity. You can't buy the sector and expect average returns, because the sector doesn't have an average. You're either buying a cash machine or a capital incinerator. The grades make it clear which is which.