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Pastimes : SI International Ope' Stock Picking Contest
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To: Don Pueblo who wrote ()8/11/1998 10:40:00 AM
From: zodiac2000  Read Replies (1) of 2640
 
 For reasons that escape me, Octel continues to be very cheap- Probably the cheapest stock on the NYSE at 3.0x free cash flow.
 Octel is misunderstood-It has a monopoly position in a declining industry. A classic recipe for BIG profits.
 Octel has delivered more than promised at the time of spin-off:

1. The Ethyl deal is a major positive and occurred much earlier than anybody could have expected.
 Effectively creates a monopoly for TEL outside of North America and Western Europe (the 2 smallest and most regulatory)
 Will likely reduce or eliminate price based competition
 Provides pricing umbrella given "value" of lead relative to other octane enhancers
 Positioned for further gains when the East German and Russian plants are closed or consolidated.

2. Earnings in the quarter were in line with expectations. Assuming a $19.00 stock price and conservative assumptions (no acquisitions and no pricing improvements):
 P/E Ratio of estimated GAAP earnings for 1998 and 1999 is 4.0x and 5.0x, respectively
 Adding back goodwill amortization the P/E's are 2.5x and 3.0x respectively
 OTL is committed to repurchasing at least $15 million of shares each year. (That is enough to purchase over 5% of outstanding shares each year)
 Only 14.7 million shares outstanding
 After the bank debt is repaid in early 2000, they will have over $50 million a year available for repurchases

3. Phase of out lead use is as expected if not better.
 Greece, Italy, Portugal, Spain and most likely France will not phase out leaded gasoline until 2003.
 They physically cannot stop using lead with the existing petrol infrastructure and the number of cars using leaded gas.
 Almost 40% of Frances cars still use leaded gasoline.

4. Almost unbelievably they are making an accretive acquisition even though OTL trades so cheaply

Management has significant incentives to maximize shareholder value through options and shares taken instead of a cash bonus at the time of the spin-off. In addition they are very savvy and should find additional opportunities to increase shareholder value

Octel is a classic value play in a crazy market. You will not be disappointed over the medium and long term. This company generates so much excess cash that it can pay off all the debt and buy back all outstanding stock within 4 years.

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