Chemical manufacturer Lubrizol Corp. (LZ) suffered a setback of 5% last week following word that it is in the bidding for a German chemical maker called Cognis,  but remains in very powerful uptrend.

You may not have ever heard of this $6 billion company, one of my top picks early this year, but that is typical for many of the mid-cap companies that power the industrial heartland of America. They aren’t showy but they produce the highly technical building blocks for more famous products. 

Take paint for instance. You know the brand names Sherwin Williams and Benjamin Moore. But Lubrizol is the company that makes additives that increase the durability of paint so that it lasts longer and doesn’t chip. Or take engines. You probably know the names Cummins (CMI). But Lubrizol makes the lubricants that increase fuel economy, extend equipment life, and lower vehicle emissions of cars, trucks and tractors. Its fuel additives increase the efficiency of gasoline and diesel fuel. It also makes polymers used by energy explorers to make drilling easier.

More examples? OK. The company’s textile coatings add a layer of water resistance and heat insulation to high-performance sportswear and sailing equipment. And its RheoRanger is a natural product derived from plants that, when added to ice cream, improves creaminess, texture, and scoopability. Other natural additives help make meat softer, juicier and less fatty. 

While Lubrizol’s additive business generates a majority of its revenues, this specialty chemicals company with factories in 17 countries does have some other hooks in the water. One is a proprietary synthetic pipe substance called TempRite that is more durable, heat resistant and corrosion resistant than copper and lead. Additionally, Lubrizol sells ingredients to consumer products makers that you use every day, including shampoos, body wash, liquid soap, hand sanitizers, and hair conditioners. 

One key to its success: Lubrizol spends significantly more on research and development than competitors like Sigma-Aldrich (SIAL) and Ashland (ASH). Those two respectively spend 2.93% and 1.18% of sales on R&D, while LZ spends 4.3%. 

The company’s strengths have not gone unnoticed lately, as shares are up 30% this year alone. So is there anything left in the tank? Yes, I think so. Lubricant and additive prices have remained stable while other basic materials have been jittery, and profit margins are rising as the company’s scale has grown.

In 2009, the company boosted earnings significantly, added cash, and strengthened its balance sheet under adverse economic conditions. Standard & Poor’s therefore upgraded Lubrizol’s credit rating and lifted its outlook. This change will help the company finance debt more inexpensively to support organic growth and acquisitions. 

Looking at some common metrics we see that LZ boasts a return on equity of 28%, meaning the company generated an annual profit of 28 cents for every dollar invested by shareholders. Compare that with Ashland’s ROE of just 7.4%. Lubrizol is also a more efficient company, sporting an operating profit margin of 18.4% versus Ashland’s 4.3%. 

Analysts expect LZ to earn $8.21 per share in fiscal 2011, though that is almost certainly too low. Multiplying that by a industry-typical 15x multiple yields a one-year price target of $123. So despite its powerful move in recent months, there’s potential for another 35% at least.

LZ reports earnings on April 29. Expect a beat.

Tell us what you think here.

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