Will Stepan Company (SCL) be Able to Generate Steady Cash Flow?

SouthernSun Asset Management, LLC, an investment management firm, released its “SouthernSun Small Cap Strategy” third-quarter 2025 investor letter. A copy of the letter can be downloaded here. In the third quarter, the strategy returned 11.73% on a gross basis (11.52% net) compared to a 12.39% return for the Russell 2000 Index and 12.60% for the Russell 2000 Value Index. The strategy returned -0.66% on a gross basis (-0.10% net) for the trailing twelve months compared to 10.76% and 7.88% respectively for the indexes over the same period. In addition, please check the top 5 holdings of the strategy to know its best pick in 2025.

In its third-quarter 2025 investor letter, SouthernSun Small Cap Strategy highlighted stocks such as Stepan Company (NYSE:SCL). Stepan Company (NYSE:SCL) is a specialty and intermediate chemicals manufacturer and distributor. The one-month return of Stepan Company (NYSE:SCL) was -11.30%, and its shares lost 47.82% of their value over the last 52 weeks. On November 4, 2025, Stepan Company (NYSE:SCL) stock closed at $42.31 per share, with a market capitalization of $956.902 million.

SouthernSun Small Cap Strategy stated the following regarding Stepan Company (NYSE:SCL) in its third quarter 2025 investor letter:

"Stepan Company (NYSE:SCL) was a detractor in the Small Cap strategy in the third quarter. The company continues to execute on its strategy to grow its functional surfactants, which serve the agriculture and oilfield market, as well as its Tier 2 and Tier 3 surfactant volumes, which represents sales to smaller customers formulating specialty products. The second quarter results reflected solid growth in these end markets. However, weakness in the commodity consumer product end markets offset growth in these areas, and overall Surfactant segment volumes were down 1%. In the Polymer segment, volumes were up 7% driven by strength in the North American and European rigid polyols end markets despite continued headwinds from a weak macro environment and tariff uncertainty. As of the end of the second quarter, SCL generated $197 million in trailing 12-month EBITDA, and management makes a strong case that the business should generate $60 million quarterly as some market headwinds abate and the recently installed new alkoxylation capacity in Pasadena, TX, comes online later this year. SCL ended the second quarter with net debt to trailing 12-months EBITDA of 2.9x, and we expect this ratio to come down now that the heavy investment period is behind them. Luis Rojo was promoted to the CEO position in October 2024 after serving as CFO for 6 years, and we have been impressed with his execution of the business strategy so far. SCL is recognized as an industry leader in formulating new products and applications for its surfactants and polymers, and we believe the company has developed valuable, long-term relationships with customers that will continue to generate steady cash flow."

Stepan Company (NYSE:SCL) is not on our list of 30 Most Popular Stocks Among Hedge Funds. According to our database, 15 hedge fund portfolios held Stepan Company (NYSE:SCL) at the end of the second quarter, compared to 16 in the previous quarter. While we acknowledge the potential of Stepan Company (NYSE:SCL) as an investment, we believe certain AI stocks offer greater upside potential and carry less downside risk. If you're looking for an extremely undervalued AI stock that also stands to benefit significantly from Trump-era tariffs and the onshoring trend, see our free report on the best short-term AI stock.

In another article, we covered Stepan Company (NYSE:SCL) and shared the list of best dividend stocks for a dividend champions list. In addition, please check out our hedge fund investor letters Q3 2025 page for more investor letters from hedge funds and other leading investors.

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Disclosure: None. This article is originally published at Insider Monkey.