US housing upturn in 2011 could strengthen Georgia Gulf – report

09 December 2010 20:08  [Source: ICIS news]

HOUSTON (ICIS)--A recovering US housing market in 2011 could ramp up end-market earnings for chlorovinyls and aromatics producer Georgia Gulf, a US investment firm said on Thursday.

Dahlman Rose initiated its coverage of Georgia Gulf with a “buy” rating and a 12-month price target of $28/share. The company traded at $22.90/share on the New York Stock Exchange on Thursday, down one cent from the prior close. 

“We do not see a lot of downside risk considering the current state of the vinyls market,” the report said. “Upside, however, is considerable.”

The report on Thursday came more than a year after the company’s precarious return from near-bankruptcy

Dahlman Rose managing director Charles Neivert did not cite when stock prices would go up, noting in the report that Georgia Gulf shares historically have responded rapidly to a recovery in earnings. But an upswing in the housing market appeared crucial.

“[Georgia Gulf Corporation] is still first and foremost a housing play,” the report said. “Although it is significantly improved with the recent restructuring, the shares will have a hard time reaching full potential without improvements to the housing market.”

Dahlman Rose said the likely scenario, with a 70% probability, was a gradually-recovering US housing market with modest growth in gross domestic product (GDP). The scenario estimated that housing starts would slowly edge back to an annual rate of 750,000 to 800,000 units by the end of 2011 as the GDP grows slowly.

Georgia Gulf was close to declaring bankruptcy in 2009. The report cited major financial restructuring that included reducing debt and closing, selling or consolidating facilities for polyvinyl chloride (PVC) production and building product operations.

In recent months, however, Georgia Gulf has been able to advantage of low prices in natural gas, the report said. The company buys natural gas to produce steam and electricity for its chlor-alkali production instead of consuming electricity from the grid.

Natural gas averages in 2008 were $8.86/MMBtu. But thus far in 2010, the average has been about $4/MMBtu, the report said.

In housing, the pending home sales index in October rose to 89.3 on a scale of 100, up from September’s level of 80.9, according to the National Association of Realtors.

But the housing market has yet to recover from its drawn-out downturn, with foreclosed homes making up 25% of all home sales in the third quarter, according to RealtyTrac, which lists foreclosures.

The US housing market, especially new home construction, is a key downstream consuming sector for a broad range of chemicals and resins, particularly as end-product components or in manufacturing processes for building materials.

Georgia Gulf manufactures chlorvinyls, which include chlorine, caustic soda, vinyl chloride monomer (VCM), vinyl resins and compounds. Georgia Gulf also produces aromatic chemicals.

($1 = €0.75)

By Ruth Liao

For more on Georgia Gulf 's plants, visit ICIS plants and projects
For more on PVC, VCM or caustic soda visit ICIS chemical intelligence
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