Cytec Rides the Cycle
Friday January 21, 1:47 pm ET
By Stephen D. Simpson
Specialty chemical company Cytec Industries posted the sort of quarter Thursday evening that could make even a tech investor smile. Boosted by gains across the business, the company posted revenue of $451 million and EPS (after gains) of $0.68. The first number is 25% higher than the year-ago, while the second is 89% better -- and both numbers beat Wall Street expectations.
Cytec has four primary businesses -- Water and Industrial Process Chemicals, Performance Products, Specialty Materials, and Building Block Chemicals -- and all posted double-digit growth for the quarter. The smallest of the four, Building Block Chemicals, was the real growth star this time around: Sales increased 84% (with 49% of that coming from price increases). Overall, revenue growth derived from volume increases (16%), price increases (7%), and favorable currency (2%).
One of the things that a Fool can really appreciate about Cytec is the extent of disclosure in the press release. Not only does the company include a cash flow statement in the earnings release (something every company should do!) but also management devotes significant time to giving investors as clear a picture of the business as possible.
That said, the company declined to offer specific guidance for the next year. While Cytec will continue to face high energy costs and a shortage of propylene through 2005, the firm seems well-positioned to stay more than a step or two ahead of its rising costs. Assuming that the economy stays on track for the foreseeable future, there should be no change in the ongoing shortages of specialty chemicals, and that spells P-R-O-F-I-T for Cytec.
Trading at about 19 times trailing earnings and 2.3 times book value, Cytec trades at a discount to the specialty chemicals group, even though the company's growth, margins, and return on equity are all higher. Though the company's EV/FCF is high at 25, Cytec has spent aggressively to build capital infrastructure to support growth, and this investment should be repaid over the coming years if demand stays strong.
Fools considering jumping in should remember that this is a highly cyclical company that's already about 18 months into an upswing. While volume and price increases will eventually reverse themselves, there still might be some room to run for the companies that supply our economy with its building blocks. Investors wishing to go along for the ride might just want to see whether specialty chemical maker Cytec is special enough to make their cut.
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