Engineering News

Do Specialty Chemicals Make Cytec Special?
Monday August 8, 4:08 pm ET

Now wait a minute. Aren't these supposed to be the halcyon days for commodity companies? Whether it's copper, plastics, coal, or lumber, if it's a commodity that your company sells, your stock has had a great run. That is, unless you're Cytec Industries.

Despite a robust investor demand for seemingly all sorts of commodities, these shares have climbed only a few percentage points over the past year. Contrary to what the price performance might suggest, performance in the second quarter was alright. Reported sales were up 93% -- largely the result of the acquisition of surface specialties business UCB Group. Looking at the pre-existing business, Cytec saw overall revenue growth of 14%, with only 1% of that attributable to foreign currency.

Admittedly, a first look at the earnings side of things is about as fun as a pleasure cruise through a chemical waste repository. A sea of charges and gains makes results a little confusing, but when you strip everything away, you see net income of $0.92 a share -- slightly better than expectations and up about 11% from last year.

With a company as diverse as Cytec, it's not always easy (or helpful) to readily identify winning and losing businesses. Nevertheless, the water treatment and mining businesses are very strong, and the company is seeing large order volume from aerospace customers like Boeing and Airbus. While demand for building-block chemicals is robust, exceptionally high raw material costs have taken a bite out of profits.

I thought these shares looked undervalued back in January, and, indeed, the stock dutifully climbed a bit before making a nosedive starting in early April. Not only do investors seem worried about management's ability to integrate such a large acquisition (the surface specialties acquisition comes close to doubling the company's revenue run rate), but they also appear concerned about the company's debt and its ability to stay ahead of rising costs.

Those are reasonable concerns, up to a point. I'd hereby like to suggest that trading at only three-quarters of the P/E of its peer group (and below non-specialty companies like DuPont and Bayer) might be a touch overdone.

Having said that, it's tough for me to recommend that Fools go out and load up on this stock. Yes, the company does have a strong or leading position in many attractive markets (like water, mining, and aerospace) and should be able to improve margins, rates of return, and cash flow from here. But at the end of the day, Cytec is still in a commodity business, and those are generally the sorts of stocks that you date, not marry.

Source: Motley Fool

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