Atlantic Investment Management Likes This Chemicals Company

Atlantic Investment Management, a fund run by Alexander Roepers with about $2 billion in assets under management, has filed with the SEC to disclose that it has purchased 3.9 million shares of Rockwood Holdings, Inc. (NYSE:ROC). Rockwood is a $4 billion market cap company which developed specialty chemicals that are then used for a variety of functions, including auto bodies and pharmaceutical-related uses. Atlantic had initiated a position in the company in the fourth quarter of 2011, opening 2012 with 600,000 shares in its portfolio. The fund then approximately doubled its position in each of the last two quarters and reported owning 3 million shares at the end of June (find out what other stocks it owned in its portfolio). Atlantic’s most recent purchases give it 5.1% of Rockwood’s shares outstanding, triggering the requirement to file a 13D. So far this year the stock is up 27%, outperforming the market, though thanks to a rough period towards the end of last year it is only up 5% compared to a year ago.

Alexander Roepers

Atlantic now owns about the same number of shares- 3.9 million- that Iridian Asset Management owned at the end of the second quarter. Iridian is managed by special situations investors David Cohen and Harold Levy (see more stocks that Iridian likes). Event-driven investor Barry Rosenstein’s JANA Partners initiated a position of 1.1 million shares in Rockwood during the second quarter of 2012 (research more stock picks from JANA Partners).

According to Rockwood’s 10-Q, the business is down compared to 2011; revenue in the second quarter of 2012 was down 9% from the figures in the second quarter of last year. Operating income fell 7%. A large income tax benefit pulled net income higher than a year ago, but this only serves to mask the company’s struggles. Revenue in the first quarter of the year was about the same as in the first quarter of 2011, and over the first half of the year operating income was about flat. Just over half the company’s business in 2011 came from Europe, so the financials reflect negative impacts both from poor European macro and from the rise of the dollar compared to the euro.

As a basic materials company with significant exposure to Europe, Rockwood Holdings, Inc. carries a high beta of 2.5 and so would not make for a good investment for an investor who is bearish on global macro. The company has started paying a dividend, with a yield of 2.9%, but this amount of money could easily be lost in an investment in the company due to a bad day in the market. The stock trades at 9 times trailing earnings and 11 times forward earnings estimates, and so along with the yield there is some case to be made for it as a value play. However, investors would have to have some confidence (as Atlantic apparently does) that the company will be able to get through the next few quarters with its current revenue and earnings numbers intact.

PolyOne Corporation (NYSE:POL) is the closest peer for Rockwood Holdings, Inc. PolyOne carries a trailing P/E of 20, but sell-side expectations are for strong earnings per share growth next year and so the forward P/E is 13 (still above Rockwood’s despite the smaller market cap of $1.5 billion). Between the two we think that Rockwood is the better buy. Other specialty chemicals companies include RPM International Inc. (NYSE:RPM), Cytec Industries Inc (NYSE:CYT), and Huntsman Corporation (NYSE:HUN). RPM and Cytec look very similar from a valuation perspective- they both trade at 18 times trailing earnings and 14 times forward estimates- while Huntsman is considerably cheaper at a trailing P/E of only 11. All three of these companies grew their earnings last quarter compared to the same period in 2011. We would want to take a closer look at Huntsman but Rockwood looks cheaper than the rest of its peers.

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