sikiliza (< 20)

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

Competition

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.

Management

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