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Nalco Holding Shares Are Worth a Look

The company looks good as a buyout candidate or on its own

   

Arch Chemicals’ (NYSE:ARJ) stock is up 11.3% on the news that it will be bought by Swiss specialty chemicals and biotechnology company Lonza for $1.2 billion in cash. This got me thinking about other companies in the industry that might be candidates for larger businesses seeking a foothold in this attractive market segment.

Nalco Holding (NYSE:NLC) is not in exactly the same segments as Arch, but it has a similar focus on cleaning chemicals. Nalco sells $4.3 billion worth of chemicals and technology used in water treatment, pollution control, energy conservation, oil production and refining,
steelmaking, papermaking, and mining.

There are three reasons for modest optimism on Nalco’s stock:

  • Long-term financial strength — though debt level is worrying. Nalco has grown steadily. Its revenue has increased at an average rate of 5.1% over the last five years, and its net income has risen at a 32.6% annual rate over that period. In addition, its cash grew at a 36.4% annual rate between 2006 ($37 million) and 2010 ($128 million). But Nalco still has too much debt — although it declined to $2.8 billion in 2010 from $3.1 billion in 2006, Nalco’s debt-to-equity ratio of 3.21 is almost three times the industry average of 1.1.
  • Strong, but disappointing first-quarter earnings. Nalco first-quarter earnings missed analysts’ estimates but revenue, which grew
    11%, beat expectations. Nalco left unchanged its 2011 EPS guidance of $1.65 — 2% below analysts’ estimates of $1.69 a share.
  • Under-earning its capital cost– but that’s improving. Nalco
    earned less operating profit than its cost of capital but since it’s improving, Nalco’s EVA momentum –which measures the change in
    “economic value added” (essentially, profit after deducting capital costs) divided by sales — was 4%, based on 2009 revenue of $3.7 billion, and EVA that improved from negative $253 million in 2009 to negative $117 million in 2010, using an 11% weighted average cost of capital.

As for the possibility of Nalco being acquired — it already was, back in 1999. At the time, Nalco closed a deal to be acquired by Suez Lyonnaise des Eaux, a $32 billion company with 200,000 employees worldwide. But five years later, Nalco returned to the New York Stock Exchange as an independent company.

Even without the possibility of being acquired, Nalco is a bargain-priced stock. Nalco’s price-to-earnings-to-growth ratio of 0.5 makes
it very undervalued (a PEG of 1.0 is considered fairly priced). Nalco’s P/E is 14.1 and its earnings are expected to grow 26.8% to $2.08 a share in 2012.

Even if Nalco remains independent, its very low valuation makes its stock worth considering.

Peter Cohan has no financial interest in the securities mentioned.

 


Article printed from InvestorPlace Media, https://investorplace.com/2011/07/nalco-holding-shares-are-worth-a-look/.

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