Picked up nice chunk of shares of ROC at 30.70 today.
Here's some of my past research:
Polypore, Albemarle Lead Specialty Chemical Rebound
By JASON MA, IBD June 17, 2011
Polypore's membranes are key components in lithium ion batteries, which power hybrid and plug-in electric vehicles (Chevy Volt pictured). A few years ago, a handful of analysts forecast long-term declines in the U.S. petrochemical sector as new capacity in Asia and the Middle East challenged the industry's competitive verve.
But fortunes have turned. On June 6, Royal Dutch Shell (RDSA) announced plans for its chemical division to build a "world class" ethylene refinery in the Northeast. In April, Dow Chemical (DOW) said it planned a similar facility for the Gulf Coast, and would restart idled ethylene plants in Louisiana and Texas. A joint petrochemical venture between Chevron (CVX) and ConocoPhillips (COP) plans an equally ambitious Gulf Coast facility.
Estimated to cost more than $1 billion each, the projects are just one among many signals that the global chemical trade is rebounding hard from its 2008-09 slump, and that the U.S. segment figures prominently in the bounce. The most profitable corner of the industry, specialty chemicals, is showing particular strength. Specialty chemicals makers are raising prices, almost across the board, in the face of rebounding industrial demand and rising raw materials costs.
One example: Naphtha, a key chemical feedstock, averaged $525 a metric ton in 2009, $710 last year and passed $1,000 in April.
Pricier raw materials were one reason Dallas-based Kronos Worldwide (KRO) raised prices on its titanium dioxide pigments, used in coatings, plastics and paper, in May for the second time in several months.
Earlier, peer Rockwood (ROC) raised pigment prices by up to 10%, citing "the rapid increase of ocean freight, raw material costs and energy prices." Albemarle (ALB) boosted the price of certain flame retardants 3 times since Feb.
But the industry is also seeing wider margins in some areas, as a broad range of natural-gas-related feedstocks have fallen in price, due to the recent surfeit of natural gas supplies.
Those supplies lifted U.S. ethane production by 25% in 2010, "providing a significant feedstock cost advantage for U.S. petrochemical manufacturers," said Stephen Pryor, president of Exxon Mobil's (XOM) chemical division, at a gathering of analysts in March.
Despite the price increases, manufacturers and industrial buyers haven't yet started to push back, said Michael Sison, an analyst with KeyBanc Capital Markets. Sales volumes have been growing in the mid to high-single-digit percentage range, lifting profits despite the price hikes. "People are aware of the (price) pressures," Sison said. "It makes increases more palatable."
1.Business
The sector encompasses a wide range of companies. Praxair (PX) manufactures and distributes industrial gases. Solutia (SOA) makes specialty coatings. Polypore International (PPO) makes filtration membranes. Sigma Aldrich (SIAL) makes chemicals used in genetic research.
The industry differs from the basic chemicals trade, which produces commoditized chemicals and materials in much larger quantities. Specialized chemicals also have unique handling and transportation requirements. Many chemical makers offer a portfolio of services to support those needs.
Praxair, for example, provides pipeline and storage tank services that include cleaning, purging, leak detection and hydrotesting.
The value of such services can be as much as the value of the chemicals themselves, said Ray Will, principal analyst with IHS Global Insight's SRI Consulting.
The result helps further expand profit margins for specialty chemical companies beyond those of the basic chemicals sector, he added. Those profits are, in turn, attracting fresh interest as specialty and basic chemical companies compete for market share. In 2009, Dow (DOW) bought specialty coatings firm Rohm & Haas for $15 billion. DuPont (DD) is closing in on a $6.6 billion takeover of ingredients and enzymes maker Danisco.
Late last month, Ashland (ASH) agreed to buy International Specialty Products for $3.2 billion in cash.
Conglomerate Berkshire Hathaway (BRKA) also grabbed a piece of the action, buying lubricant maker Lubrizol (LZ) for $9 billion. Such consolidation is reinforcing the industry's already-high barriers to entry.
• Name of the Game: Manufacturers can keep margins up by further specializing their chemical products and offering unique services. Companies must stay ahead of regulations and shifting preferences that favor more environmentally friendly formulations.
2.Market
Specialty, or performance chemicals are generally produced in lower volumes than basic chemicals. End markets include electronics, wastewater management, oilfield services, flavor and fragrance design, rubber processing, papermaking and solar panels.
The definition of specialty chemicals varies. So do estimates for the size of the industry. Larry Sloan, chief executive of the Society of Chemical Manufacturers and Affiliates, gauged the market at $400 billion to $650 billion, depending on what types of companies were included.
The higher-growth areas: chemicals used in electronics manufacturing, auto emission control, cosmetics and so-called nutriceuticals, especially in developing markets like China and India, he said. "There are specific sweet spots we're finding," he added.
Those sweet spots helped boost global specialty chemical output 7.5% in 2010 compared with 2009. It is expected to rise 5.9% in 2011, according to projections from the American Chemistry Council, with U.S. production seen lagging that of developing countries.
Also, specialty chemical makers are generally less prone to cyclical downturns than commodity chemical companies, said Will. For example, output of customized chemicals, which generally are made in batches, is easier to scale down. Producers of commoditized products rely more on large-scale plants running nonstop just to maintain their thinner margins.
3.Climate
Specialty chemicals may be getting a tad greener, as industrial customers demand compounds to help them use fewer resources and foster a better environmental image, Sloan said. Chemical makers also anticipate the U.S. will follow Europe's lead in adopting stricter environmental regulations. Many companies are trying to get ahead of the curve, Will said, with some already responding to tighter European rules. "There is pressure to reformulate to adapt to regulations," Will said.
Another sweet spot: Demand is rising for chemical products derived from sugars and other renewable sources to avoid paying for petroleum and natural gas feedstocks, Sloan said.
But just as the pressure toward new chemical formulations is increasing, the industry has been forced to pare spending on research and development to cut costs. In addition, companies are lobbying hard against legislative proposals to regulate chemical safety in ways that some see as potentially threatening to innovation.
4.Technology
The specialty chemicals sector hasn't hit a real, technological home run recently, said Sison. Instead, advances tend to come in increments. "They're mostly singles and doubles," he explained.
The pace of technological growth may stay that way. Mergers often take place as a means to acquire new products, rather than develop them in house. But after companies merge, research departments get cut — a convenient way to maintain profit margins.
W.R. Grace's R&D spending fell to $60.3 million in 2010 from $70.1 million the year earlier. Albemarle's expenses edged down to $58.4 million in 2010 from $60.9 million.
Will said cutting research dollars after an acquisition is a pattern, especially among producers of lower-margin chemicals. "I really can't spin a happy picture of R&D," he said. "We've seen a declining trend."
Some makers of higher-end products, however, are boosting research. Solutia and Sigma-Aldrich slightly increased R&D spending in 2010. Dallas-based Kronos Worldwide expects to increase its R&D budget between 35% and 54% this year.
5.Outlook
If the interest among nonspecialty chemical makers in acquiring companies in the sector is any indication, specialty chemicals appear to be headed for more deals. Sloan also expects worldwide growth this year and next, fueled by the economies of China and India. Member companies, many of which are small- and medium-size firms, are hiring and expressing more optimism. Still, he notes a host of wild cards — inflation, a weak construction sector, persistent unemployment, the Japanese economy and possible asset bubbles in China. "There's just a lot of uncertainty right now," he said.
• Upside: Sison said overall demand is holding up and he remains positive on the industry. The segment tends to outperform the rest of the economy, he said, especially in the earlier stages of a recovery. The industry has been more disciplined in its price increases vs. past rebounds, he said. Wider use of enterprise resource management software has helped, giving more detail and better clarity across company cost structure.
• Risk: Multiple indicators point to possible trouble ahead.
The Economic Cycle Research Institute sees a global slowdown in industrial activity by this summer.
Japan's earthquake and tsunami disrupted supply chains and cut production in an already fragile economy.
China's industrial pace has slowed more than expected amid efforts to contain inflation. Recent surveys of purchasing managers there showed slower manufacturing activity. Sloan is particularly wary of what he calls "impractical" legislation that could hinder innovation and competitiveness. "That's the big enchilada," he said.
Rockwood Holdings Inc. (ROC)
Credit Suisse June 17, 2011
Increasing Estimates, ROC Remains Top Pick
We are increasing our 2011 and 2012 EPS estimates on ROC to $3.57 and $4.38 respectively (from $3.41 and $3.96 respectively), to reflect:
¦ Robust TiO2 prices – based on the major producers announced price increases YTD, we now forecast TiO2 sales up 25% and 13% in 2011/12 respectively (vs. up 10% previously) with 50% falling to the bottom line in 2011 and 23% in 2012 (which may be conservative). Longer-term, TiO2 remains a non-core business and we think mgmt may sell it in the future, which could be a positive catalyst for the stock.
¦ Higher lithium volumes/prices – lithium volumes are growing double-digits, driven by strong demand from the power tools and electronics markets. Additionally, ROC announced lithium price increases of up to 20% across their lithium portfolio, with prices expected to return to the 2008 level (~$5,000/ton). We estimate this will add $0.11/0.22 to EPS in 2011/12. As such, we forecast Specialty Chemicals sales growth of 16%/12% in 2011/12
(which will be conservative if the entire price hike holds).
¦ Positive mix/margins in Advanced Ceramics – ROC is benefitting from strong growth in the Medical segment (35%), which is a higher margin business. As such we expect the positive mix to drive margin expansion. We believe our 2011 estimate of $3.57, which is roughly in line with the consensus, may be conservative. Moreover, our 2012 estimate of $4.38 is solidly above consensus of $4.15. Additionally, assuming all of the lithium price increases go through and margins in Advanced Ceramics and Specialty Chemicals expand with operating leverage and mix benefits, we believe ROC can do closer to $5.00 of earnings in 2012.
With the stock trading at 5.7X our 2012 estimates, we believe the street is under appreciating the robust earnings potential and high quality of ROC’s businesses. As such we reiterate our Outperform rating and $70 PT.
>>> Rockwood Holdings Inc. (ROC)
Credit Suisse Apr 27, 2011
Upward Earnings Revisions and Multiple - Expansion to Drive Stock; Remains Top Pick
Following ROC’s much better than expected 1Q11 results, we are increasing our 2011/12 EPS estimates to $3.41/3.96, well above the street at $2.81/3.48 respectively and expect the street to come up towards our numbers.
Our revised estimates reflect 61%/16% EPS growth in 2011/12 respectively, driven by continued strong demand/ pricing in ROC’s high value segments (lithium, ceramics), robust pricing/mix benefits in TiO2 and ROC’s strong FCF that mgmt will use to reduce debt/interest expense. Further, we believe that there is solid upside potential in our numbers but want to remain cautious given Japan and the macro environment.
Given the higher numbers, we are increasing our 12-month PT to $70 from $57, which represents a 7.8X multiple on our 2012 EBITDA estimate (assuming FCF goes toward reducing net debt). With ROC currently trading at 6.8X our 2012 EBITDA, we believe ROC offers one of the most compelling risk/reward profiles in the chemicals space and reiterate our Outperform rating.
¦ Demand/Sales–ROC benefited from robust sales/demand growth in 1Q (volumes/mix +9.5%) that was enjoyed by all of the segments and didn’t include anyone one-time benefits. Looking ahead, we expect the positive trends to continue, with our expectation for ROC to enjoy 7.6%/7.8% sales growth in 2011/12 respectively. This will be driven by: 1) robust pricing/positive mix in TiO2 (~40% of sales tied to specialty applications and ROC continues to target 50-55%), 2) strong demand for lithium from the consumer electronics and power-hand tools markets (demand currently growing at double digits rate) as well as higher pricing of downstream lithium compounds, 3) robust demand in Advanced Ceramics driven by the medical market as ceramic hip joints continue to replace metal-to-metal hip joints (this is happening faster than we/ROC expected) and 4) solid demand in surface treatment driven by increased demand for autos in Europe.
¦ Margins–ROC met/exceeded their longer-term margin targets in a number of the businesses in 1Q and based on the robust top-line growth expected, we believe margins have the potential to push higher from the current record levels – that said, to be conservative, we are modeling slightly lower margins for the remainder of 2011 (adjusted for season-ality) and 2012 in each business but TiO2. As such, we expect operating margins to approximate 15.1% in 2011 and 15.6% in 2012. This will be driven by improved operating leverage off the top-line growth as well as benefits from mix and pricing. Also, recall ROC is largely immune to the raw material headwinds a number of the other specialty chemical companies are facing, given they don’t rely on organic/crude-based raws.
¦ Debt/Cash–Upon receiving the $289 mil of net proceeds from the sale of AlphaGary, ROC prepaid $409 mil of term debt and refinancing the $850 mil senior secured debt. This resulted in net-debt/LTM adjusted EBITDA going from 2.44X (pro-forma for the proceeds from the sale of Alpha Gary) as of the end of 4Q10 to 2.32X as of the end of 1Q11. Going forward, management made it clear that debt reduction remains a top priority and ROC will use its strong FCF to continue paying down debt, unless a very attractive bolt-on opportunity presents itself. We view this as positive and believe ROC can significantly reduce its debt load without any impact to growth, which should transfer significant value to equity holders. |
