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Kronos - A medium term recovery play



November 28, 2011 – Comments (4) | RELATED TICKERS: KRO , HUN , DD

Kronos Worldwide (NYSE: KRO) is a leading producer of Titanium Dioxide pigment which is used to impart whiteness, brightness and durability to paper, plastics and other modern day items that we use daily. 

KRO produces most of its TiO2 in Europe and also sells just about 53% of it in Europe, pointing to a high exposure to European economic woes. However, if (and when) things begin to brighten, KRO will brighten your portfolio along the way.

What makes this company compelling is not only the fact that demand for TiO2 currently exceeds supply by a wide margin, but also that the management have a strong belief in its future performance resulting in unprecedented insider buying in the last few months.


First off, the hard numbers:

Quarterly Revenues have grown at a 10% CAGR in the last year from 376MM in Q3-2010 to 548MM in Q3-2011-  The company now has 2.1BB annual run rate for 2011 vs. 1.45BB in 2010

Operating margins have doubled from 15% to 29% in the last 4 quarters

ROE now stands at 18%,  alongside a 3.1% dividend yield and a 7.9 PE (fwd PE – 5.6)

Debt to equity is at 45% which looks sustainable as the company generates an average $115MM cash from operations each quarter


The company ranks third in worldwide production with Dupont and Cristal leading the pack:

DuPont   23%

Cristal      14%

Kronos    10%

Huntsman 9%

Tronox  7%

Other    37%

Industry factors

Global TiO2 demand was 4.7 million tonnes in 2009 and was forecast to grow at an average of 2.1-2.6% per annum over the period 2007-2015. At the same time, global production falls short with this key ingredient in automobile paint production, in short supply. This has led to sustained price increases that are expected to keep trending upward through 2012.


The chairman and vice chairman of the board have collectively bought back 661K shares valued at a total $12.3MM in the last 6 months from the open market. Steven L. Watson, the CEO, has worked with Valhi (KRO’s parent company) or related companies since 1980 and the CFO has been with Valhi companies since 1988.

Risk Factors

The global slowdown could impact demand for TiO2 but with the industry currently facing capacity constraints, the current high prices would still hold up. There is some concern over earnings misses in the last quarter and the company has spent a net of $0.5BB in the purchase and sale of investments which relate to holdings in mutual funds investing in govt and corporate securities. Harold Simmons, the chairman seems to have quite a bit of cache and may not be beyond a few shenanigans here and there. 

Investment thesis

KRO is reasonably valued, has healthy growth in revenues and margins have drastically improved in the last few quarters. Added to the low valuation and a 3% dividend yield, it is a buy and a medium term hold (1-3 years) if in at under $20. I would also pick up shares of Valhi (NYSE: VHI), the holding company at below $60 while at it.

Disclosure: Long KRO and looking for a comfortable entry point into VHI

4 Comments – Post Your Own

#1) On November 29, 2011 at 6:44 PM, constructive (99.96) wrote:

TROX.PK appears somewhat cheaper, trading around 6.4x annualized earnings and 7.6x annualized free cash flow.  Have you looked at it?

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#2) On November 29, 2011 at 7:30 PM, sikiliza (< 20) wrote:

I haven't looked at TROX.PK mainly because it's so difficult to get reliable information on pink sheet stocks. I would love to dig into anything you may have.

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#3) On December 01, 2011 at 1:40 PM, constructive (99.96) wrote:

I looked up their latest financial statements on their website:  And then annualized the 8 month (post bankruptcy) results.

For pink sheet stocks I check first, if that doesn't have numbers I go to the company website.

Tronox will probably list on Nasdaq or NYSE within the next year.

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#4) On December 01, 2011 at 8:11 PM, sikiliza (< 20) wrote:

Thanks MegaShort - I will certainly dig into their financials since I already have a good understanding of what the industry looks like. Will post in the next couple of days.

I never looked at FT before amd I am blown away by the richness of the data and how well its presented. Most importantly, it does a good job of breaking down what future estimates look like across participating analysts. Always a good stastistic in this market where earnings misses could send a stock down the chute. Thanks a lot!

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