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ikkyu2 (94.77)

Guiding down: OLN

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October 20, 2009 – Comments (6) | RELATED TICKERS: OLN

I seem to think I'm smarter than the market about OLN.  Here's why:

Back in August, in this blog, I predicted that 3Q earnings per share would come in at $0.12 for chlor-alkali and $0.05 for Winchester, for a 3Q EPS of $0.17.  The share price is currently $17 even, so if you annualize that, the stock, a commodity chemical manufacturer, is currently trading at a P/E of 100.

But it gets worse.  As part of their recently-reported miss, PPG noted a severe miss in their "commodities chemicals" segment.

Why do I always blog about PPG and OLN at the same time?  Well, let's look at it this way.  OLN is a chlor-alkali company serving the north american market.  PPG's Comm. Chem. division is a chlor-alkal company serving the same market.  In 3Q 08, PPG's chlor-alkali division reported record revenues of $500 million.  In that same quarter, OLN's chlor-alkali division reported record revenues of $502 million.

In other words, they are the same size and sell the same commodity.  And PPG reports 1-2 weeks before OLN.

In 3Q 08, PPG's cl-al division reported $116m of earnings on that $500m of revenue.  In 3Q 09, it reported an anemic $19m of earnings on only $287m of revenue.  The factors mentioned in the conference call were nothing extraordinary, and were the only two factors that matter: poor pricing and low end-market demand for the commodity product.

That means I have no reason to expect OLN to report anything substantially different.  Production of a commodity is pretty well set in stone.  There's no reason to expect that OLN can do it substantially more or less efficiently than PPG, and in fact for the last 12 quarters it never has.

$19 million over the 80 million or so shares out is about $0.20 a share.  But now OLN just put out $150m in debt, which it had been historically debt free; servicing that, if it's at say 10%, is going to cost them $4m a quarter.  And they have to pay out the 0.20 dividend per share as well.

Let's say that Winchester covers the debt servicing, and let's say that OLN, being a smaller company than PPG, has a little higher administrative carrying costs (historically true).  Wall St is expecting anywhere from $0.20 to -$0.14; I am expecting them to report a final number of $-0.05.

I don't short with real money, but I don't think Mr Market is going to like this number when it comes out next week (10/30).  Let's see what happens. 

6 Comments – Post Your Own

#1) On October 20, 2009 at 12:02 PM, SarahGen (99.80) wrote:

ikkyu2, this is great stuff! 

Sometimes connections like this seem so very obvious, it's unbelievable that the market doesn't just watch and learn the way you are doing.  But the market is the market - and sometimes 2 weeks is a very long time. :)

I also think that folks look at the national ammunition shortage, look for a way to invest and latch on to OLN.   But of course, like you point out, it's only a small part of their business.

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#2) On October 20, 2009 at 12:06 PM, ikkyu2 (94.77) wrote:

Winchester contributes generally 9-12% of revenue and 2-5% of earnings each quarter; when the cl-al business is hot, the percentage attributable to Winchester declines.

Winchester has been producing at full capacity since Obama was elected, incidentally.  The 5c they are going to contribute to earnings represents their ceiling. 

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#3) On October 27, 2009 at 2:23 AM, Windsun33 (77.99) wrote:

You appear to have been way off on your prediction for OLN - they just reported earnings of 50 cents vs your prediction of -5 cents...

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#4) On October 27, 2009 at 9:57 PM, ikkyu2 (94.77) wrote:

Yep.  Always happy to be wrong, especially when I have no skin in the game, because that's a learning opportunity.

I note that the market reacted as I would have expected it to had I been right - OLN's off almost 20 percent from its highs a few weeks ago.  Note also that Winchester had a record quarter and did more production than I thought they were able to do - apparently they've expanded capacity because they were pretty clear that they were running at capacity in Q1 and Q2.

If we get any visibility into *why* this happened - why did OLN's Cl-Al do so much better than PPG's - I'll report back.

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#5) On October 28, 2009 at 8:27 PM, Imperial1964 (96.65) wrote:

" Third quarter 2009 earnings include $44.3 million of pretax recoveries from third parties for environmental costs incurred and expensed in prior periods, and a $4.6 million pretax reduction in selling and administration expenses associated with the favorable resolution of a capital tax matter in Canada."

Remember, chlor-alkali earnings were only $3.9M.  So, you were right with what was going on, but wrong on the EPS number because of a couple of one-time items.  The market was reacting to the following:

"Chlor Alkali sales declined 37% in the third quarter of 2009 compared to the third quarter of 2008. This decline reflects both lower shipment volumes and lower prices. Chlorine and caustic soda shipment volumes declined 20% year-over-year. ECU netbacks in the third quarter of 2009 declined 43% compared to the third quarter of 2008."

I'm an OLN shareholder and I'm holding them because of the >5% yield.  They never fail to pay a dividend in about 80 years and I am not aware of them ever reducing it.

Thanks for the analysis. +1.

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#6) On October 29, 2009 at 1:19 AM, ikkyu2 (94.77) wrote:

Thanks, Imp64.  Looking forward to looking into the release myself this weekend - sadly, I work for a living, not as much time for this stuff as I'd like lately.

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