Small Cap Strategist is published by Crystal Equity Research an independent research resource on small capitalization stocks. Follow along as we discuss the most recent trends in the small-cap sector, investigate interesting companies and pan a few not-so-promising stocks.
investors probably pass over specialty chemical producer OM Group, Inc. (OMG:NYSE).It has a recent history of losses and by the usual
multiples of sales and earnings its stock appears pricey.I have taken a second look.The modernization of the chemicals industry is
a key step in attaining a sustainable and environmentally benign economy.
Group has undertaken an ambitious reorganization.Besides specialty chemicals, the company
produces advanced materials and technologies for a variety of industries.OM Group has held leading positions in
cobalt-based and nickel-based chemicals.Its advanced materials product list looks like the table of periodic
elements:iron, manganese, zinc, copper,
barium, all the rare earth elements and more.
products end up in everything from batteries to pharmaceuticals to semiconductors.The renewable energy, waste clean-up and
water filtration industries are particularly dependent upon high quality chemicals
and materials and are thus becoming increasingly important markets.The company claims over 4,000 customers in 50
Group had been ‘greening’ itself up with new recycling efforts for hard metals
and battery scraps.Indeed, residues and
by-products had been important sources for cobalt supplies such that over half
of OM Group’s cobalt material is now sourced from recycled material.The thing is OM Group has sold off its Advanced
Materials division including the cobalt business in March 2013 as part of an
effort to get out of commodity markets.Proceeds from the sale are being used to reduce debt.
of the most interesting developments at OM Group in recent years is its
participation in REACH, the European Community
regulation on chemicals.The idea is to protect
health and environment through safer use of chemicals.Use of dangerous chemicals is to be phased
out.This year the program is entering
into the second phase of called registration.
environmentally friendly OM Group is trying to be, it is probably not a
justification for paying a premium price for the stock.OM Group reported $1.6 billion in total sales
in the last fiscal year ending December 2012, but registered a net loss of
$38.6 million.After two years of plump
profit margins near 24%, in 2012 OM Group’s profitability slipped back to 2008-2009
recession levels near 19%.The company
also recorded $56 million in charges related to a mix of write-off, write-ups
and assessments:a step up in VAC
inventory purchase accounting, pre-tax pension settlement expense of $2.5
million, $2.9 million pre-tax gain recognized on the sale of property in China,
$6.5 million acceleration of deferred financing fees and an per-tax EPT escrow
settlement of $6.0 million.Whew!Without laundry list of charges I estimate OM
Group would have reported a small profit in the year 2012.
is a handful of analysts following OM Group who seem to think profitability is
in OM Group’s future.The consensus
estimate is $0.99 in earnings per share on $1.3 billion in total sales for the
year 2013.The consensus is composed of
a small group of four analysts, so it is a limited read on investors’
collective thinking.Still growth and
profitability seem to be the common views.That means OMG is priced at 22.5 times the 2013 consensus estimate.
more important to the investor decision is OM Group cash flow.In 2012, the company converted 12.7% of its
revenue to cash.Even with the
significant change in business lines brought about by the sale of the advanced
materials operations, OM Group is likely to remain a strong generator of
operating cash flow. Thus
while the stock seems overbought on the basis of projected earnings, in terms
of cash flow it is trading right in line with its specialty chemical peer
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of the Small
Cap Strategist web log, Crystal Equity
Research nor its affiliates have a beneficial interest in the companies