HB Fuller must boost prices to offset feedstocks - JPMorgan

24 June 2010 20:48  [Source: ICIS news]

NEW YORK (ICIS news)--US adhesives and sealants producer HB Fuller must raise prices in the second half to combat higher raw material costs, JPMorgan analyst Jeffrey Zekauskas said on Thursday.

“Successful pricing actions to offset higher raw material costs are key for Fuller in coming quarters,” said Zekauskas in a research note.

The analyst estimated that the company would see raw material inflation of 6-7% for fiscal 2010 (ending November). About 20% of Fuller’s raw material costs are tied closely to ethylene prices, and up to 60% of raw materials are ethylene and ethylene derivatives, he said.

“Fuller is attempting to pass through price increases ranging from 3%-12%. Our impression is that larger competitors are generally following the increases,” said Zekauskas.

“We believe that the worst of the raw material inflation is now probably behind Fuller, given recent decreases in ethylene and propylene prices, and we expect sequential gross margin improvement in the second half and roughly flat gross margins for the year,” he added.

Fuller’s second-quarter results were stronger than they appeared at first glance, argued the analyst.

On 22 June, the company posted adjusted second-quarter net income of $19.5m (€15.8m), up 10.8% year over year on 16.3% higher sales of $347.9m.

However, shares of Fuller fell $1.46, or 6.7%, to $20.27 on the following day as investors were disappointed with the increase in operating costs.

Selling, general and administrative expenses (SG&A) rose by an unusually high 21.2% year over year as “Fuller has been actively re-staffing its organization with officers who departed Rohm and Haas and National Starch following the acquisitions of these entities by Dow and Henkel,” pointed out Zekauskas, who had an “overweight” rating on the stock.

“The SG&A growth Fuller is experiencing is atypical, in our view, and should position it well to experience enhanced operating leverage in the future as Fuller accelerates its pace of global volume growth,” he added.

However, Deutsche Bank analyst David Begleiter, who had a “hold” rating on Fuller, said: “While Fuller is guiding toward higher quarter-over-quarter gross margins in Q3 and Q4 and operating leverage from the higher SG&A spending in 2011, we believe investors will need to see these improvements before paying for them.”

($1 = €0.81)

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By: Joseph Chang
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