Sunday, October 3, 2010

Company Focus: Lubrizol Corporation

The Lubrizol Corporation (LZ) is an innovative specialty chemical company that produces and supplies technologies to customers in the global transportation, industrial and consumer markets. These technologies include lubricant additives for engine oils, other transportation-related fluids and industrial lubricants, as well as fuel additives for gasoline and diesel fuel. In addition, Lubrizol makes ingredients and additives for personal care products and pharmaceuticals; specialty materials, including plastics technology and performance coatings in the form of specialty resins and additives. Lubrizol's industry-leading technologies in additives, ingredients and compounds enhance the quality, performance and value of customers' products, while reducing their environmental impact.

Lubrizol has a broad geographic footprint in that it has manufacturing and research facilities in 27 countries. Sales are made to more than 100 countries, basically the whole world. The Company has two operating segments: Additives and Advanced Materials. The Additives segment produces engine additives and driveline and industrial additives. The Advanced Materials segment produces engineered polymers, a product line called Noveon and performance coatings.

Sales for the quarter ending June 2010 totaled $1,401.2 million or 26.1% greater than the year-ago quarter of $1,111.0 million. Similarly, sales for the trailing twelve months ending June 2010 of $5,179.6 million were 12.9% greater than the $4,586.3 million reported for FY09 ending December 2009.

Quarterly EPS 2Q10 is $2.89 as compared to $1.92 for the year-ago period. This is a 50.5% increase in EPS. EPS diluted for the trailing twelve months ending June 2010 is $9.59, or 32.1% greater than FY09 EPS diluted of $7.26. Reported net income for TTM ending 06/10 is $668.4 million, or 33.5% greater than FY09 reported net of $500.8 million.

Along with greater levels of sales and increases in reported net income, we are seeing expansion of gross margins. GM expanded for 34.2% in 2Q10 as compared to 33.0% in FY09 and 22.3% in FY08. Operating margins continue to improve, as well. For 2Q10, OPM is 19.2% compared to 17.9% in FY09 and 1.3% in FY08. Having squeezed out efficiencies, net margin increased in 2Q10 to 12.9% from 10.9% in year-end 09.

The balance sheet appears to be strong and stable. Cash and short-term investments total $972.2 million while current liabilities total $669.7 million for the quarter ending June 2010. The quick ratio is 2.8X and the current ratio is 3.8X. These indicate that the Company has no problems meeting its short term obligations.

Looking at long term obligations, we find that Lubrizol has long term debt of $1,351.6 million and other long term liabilities of $691.5 million. Total liabilities to total assets are 56.1%, less than the industry median of 58.9%. Long term debt to capital is 38.9%, greater than the industry median of 23.3%. Long term debt to equity is 63.6% whereas the industry median is 21.8%. Total liabilities to the four year average free cash flow is approximately 5X.

Lubrizol pays an indicated dividend of $1.29 per share providing a yield, at current prices, of 1.4%. The dividend represents a payout ratio of 13.2%.

Looking ahead, analysts are projecting FY10 EPS ranging from $9.85 to $10.15 with a consensus forecast of $10.05 per share. Reuters reports that five analysts estimate sales in the range of $5,294.8 million to $5,555.0 million with a consensus of $5,418.4 million. Analysts are optimistic for FY11, as well. They project EPS ranging from $9.20 per share to $11.00 per share averaging $10.25. These projections are based on sales estimates of $5,322.3 million to 5,856.0 million and a consensus forecast of $5,597.4 million. The FY10 sales estimate represents a 18.1% increase over FY09 sales. Analysts expect a slowdown in earnings growth though they have been surprised in the last two reported quarters.

Shares of Lubrizol are currently selling at 11.1X trailing twelve month earnings of $9.59 per share and 10.6X estimated EPS. Forward looking EPS growth is estimated at 23.4%. The Company pays a dividend and has been buying back stock. Given that Lubrizol is selling at a discount to the market, has good prospects, pays a well-covered dividend and is buying back stock, we believe Lubrizol is worth a close look.

DISCLOSURE: The author holds a long position in Lubrizol.
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