Strong Volumes Drive Specialty Results

31 January 2000 00:00  [Source: ICB Americas]

By Joseph Chang

A resurgence in sales volumes for most leading specialty chemicals and continuing gains in operating efficiencies more than offset higher raw material costs for many specialty chemical manufacturers during the fourth quarter. Rohm and Haas Company and Cytec Inc. exceeded Wall Street expectations, but Hercules Inc. warned of a shortfall.

Rohm and Haas's fourth quarter 1999 earnings soared 84 percent on a comparable pro forma basis to $101 million as sales rose 6.4 percent to $1.68 billion. Earnings per share of 46 cents blew past Wall Street expectations of 40 cents, sending shares of Rohm and Haas up $3.38 to $43.38. Full year 1999 profits were up 27 percent to $391 million on 3.5 percent higher sales of $6.65 billion.

"This is a wonderful performance," says chairman and CEO Raj J. Gupta. "It reflects strong growth in our most important businesses, an extremely smooth integration process and excellent control of internal costs--even as we operate within an environment of considerably higher raw material costs."

Fourth quarter pro forma net profits for the electronic materials segment more than doubled to $29 million versus $13 million in the year-ago period on 26 percent higher sales of $254 million. Performance polymers earnings surged 22 percent to $89 million because of a 4 percent sales gain to $857 million. Earnings by the company's chemical specialties and salt segments were both flat.

"Rohm and Haas continues to demonstrate its ability to integrate large acquisitions while simultaneously not losing sight of its customers, growing top line sales while at the same time dramatically reducing its cost structure," Lehman Brothers analyst Timothy Gerdeman says. He expects the company's earnings momentum to increase dramatically in the second half as price increases hold and raw material costs abate.

Cytec Industries Inc. posted a 4 percent gain in underlying fourth quarter earnings to $30.2 million on essentially flat sales of $341 million. Earnings per share of 68 cents exceeded expectations of 65 cents. Underlying earnings for the full year fell 5 percent to $115.3 million in the wake of 2 percent lower sales of $1.44 billion.

During the quarter, sales by the company's performance products segment increased 12 percent to $114.9 million, and operating earnings surged 65 percent to $15.5 million. Sales by the water and industrial process chemicals segment climbed 10 percent to $98.5 million and its profits edged up 5 percent to $10 million.

Specialty materials sales fell 18 percent to $94.5 million, but earnings gained 12 percent to $20.8 million. Sales of building block chemicals rose 3 percent to $46.2 million, but that unit posted a loss of $900,000.

"Cytec is the cheapest stock in the sector at 4.2x EBITDA (cash flow) versus 6x for the group," says CS First Boston analyst David Begleiter. "We also believe it is the best positioned to benefit from accelerating global demand."

Ferro Corporation's fourth quarter earnings rose 9 percent to a record $18.7 million as its sales increased 3 percent to a record $214 million. Full year 1999 profits gained 5 percent to $73 million on flat sales of $1.36 billion.

Coatings sales rose 2 percent to $213.5 million, while operating profits fell 1 percent to $25.3 million. Sales by Ferro's chemicals segment fell 4 percent to $71.3 million, but that unit's earnings gained 11 percent to $9.2 million because of an improved sales mix. The plastics segment's sales jumped 13 percent to $63.9 million, but its earnings rose only 1 percent to $4.9 million as they were held back by higher raw material costs.

Hercules warns that its fourth quarter earnings per share will fall 20 to 25 percent below Wall Street expectations of 57 cents because of higher amortization expenses for new information systems, higher interest charges and corporate costs such as Y2K shutdowns.

Hercules' process chemicals and services unit faced a downturn in profits compared to the third quarter because of paper mill shutdowns and pricing issues. Unanticipated year-end costs also hurt earnings by the BetzDearborn division.

Lehman Brothers' Mr. Gerdeman has cut his 2000 EPS estimate on Hercules from $2.45 to $2.25, which represents a 12 percent increase over reduced 1999 earnings. Shares of Hercules plunged $3.68 to a near 52-week low of $17.63 in the days following the announcement.

On the flip side, W.R. Grace & Co. indicates that its fourth quarter earnings will come in ahead of Wall Street expectations--at 44 to 50 cents per share versus the consensus estimate of 39 cents.

CS First Boston's Mr. Begleiter notes that this will be the seventh consecutive quarter in which Grace has exceeded expectations. He adds that the expected 2.5 percent sales growth, while modest, represents Grace's highest growth in three years. Yet despite the good news, shares of Grace barely budged from a near 52-week low of around $12.

M.A. Hanna Company's underlying fourth quarter earnings recovered to $9.4 million compared to $2.1 million in the year-ago period. This improvement was led by 6 percent higher sales of $565 million. Full year 1999 earnings fell 4.6 percent to $39.3 million although sales firmed 1 percent to $2.3 billion.

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