Specialty Chemicals: Boring But Profitable

by Lawrence Meyers | January 31, 2013 9:33 am

Specialty Chemicals: Boring But Profitable

Close your eyes and imagine the annual meeting at Albemarle Corp. (NYSE:ALB[1]). Some dude in a suit drones on, “Our Catalyst segment saw strong growth this year, thanks to increased usage of our refinery catalysts, including hydroprocessing catalysts, fluidized catalytic cracking catalysts, additives and, of course, organometallic co-catalysts, and metallocene components and … okay, enough with this. Bring on the dancing girls!”

I jest, of course. I’m sure there are plenty of investors interested in the finer aspects of alkenyl succinic anhydride in paper sizing formulations. All I know is that there was a reason I stopped at a Bachelor’s Degree in Chemistry and turned to Hollywood and then investing. I like money more than I do tertiary amines for surfactants … and I’m better at making money than synthesizing compounds.

All of this is a long-winded way of saying that a boring specialty chemical business is a great investment. In Albemarle’s case, it’s a company with tremendous management consistency and experience. Many senior officials have 20 or more years in their fields, while the team has been introducing numerous new products over the past years. In fact, a third of company revenue is from new products.

Albemarle also has a sophisticated global network for research and development, with four locations in the U.S., one in the Netherlands, one in Belgium and two in Asia. All locations are, of course, located near its biggest customers, which cuts down on transport costs. The company’s niche is working with chemical systems that require multiple complex steps or are too dangerous for others to handle or manufacture. A lot of it involves things called “catalysts” which, as the name implies, helps push various chemical reactions along.

This is the kind of company I love because they are very much behind-the-scenes: They create the basic materials used in all kinds of applications, some of which you see, some of which you don’t. They help create the things you’ll never think about.

The trick with a company like this, however, is that it depends greatly on global economic conditions. Right now, those conditions aren’t great … and we’re seeing it quarterly results. Net sales were $688 million in the most recent quarter — 3% drop year-over-year but a 4% gain sequentially. Adjusted EPS hit $1.17 — up 4% year-over-year — and was essentially flat for the full year.

Still, this means the company made about $436 million in fiscal 2012 and generated $160 million in cash flow.

The company’s outlook for 2013 is decidedly mixed, with some segments expected to do better than others. This is where the benefit of experienced management comes in, though. The team is well-equipped to shepherd the company through difficult times. Plus, Albemarle sits on $545 million in working capital and $478 million in cash. It also paid out $69 million in dividends — a 19% year-over-year increase, while repurchasing $64 million in shares — about 1% of its float.

Analysts are looking at 8% long-term growth for the company. On FY13 expected earnings of $5, the stock’s fair value looks to be around $40, yet is trading at $63. Just look at its competitors: Chemtura (NASDAQ:CHMT[2]) trades at only 13 times estimates on 16% growth. W.R. Grace & Co. (NYSE:GRA[3]) is trading at 15 times estimates on 6% growth, looking quite overvalued.

Albemarle’s price indicates a few things to me. First, the market is putting a lot of value on this company based on its experience and niche. This may also be an example of bond investors fleeing the lack of yield and looking for other assets, inflating the stock price without good reason.

The bottom line: Over the long term, Albemarle is a solid company … it’s just a bit too pricey right now. Keep an eye on this boring stock, because sometimes boring is best.

As of this writing, Lawrence Meyers did not own a share in any of the aforementioned securities.

Endnotes:
  1. ALB: http://studio-5.financialcontent.com/investplace/quote?Symbol=ALB
  2. CHMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=CHMT
  3. GRA: http://studio-5.financialcontent.com/investplace/quote?Symbol=GRA

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