What’s the value?
Founded in 1919, Ferro is a specialized chemical maker with worldwide leadership in the manufacturing of glazes and enamels for a wide variety of applications, including ceramic tile, appliances, and autos. The company also produces electronic materials that improve the conductive efficiency of technology devices. However, the rapid pace of change in this latter segment, especially in the solar-manufacturing arena, has led to weak overall financial results for Ferro Corporation (NYSE:FOE).
In its latest fiscal year, Ferro reported fairly dismal financial results, with an 18% decline in total sales and an adjusted operating loss. While sales in its performance-coatings business held up well, sale volumes and prices were sharply lower in its electronic-materials business amid large declines in precious metal raw-material prices. Given Ferro Corporation (NYSE:FOE)’s heavy fixed-cost structure, though, the downdraft in sales led to red ink in the company’s bottom line.
A way forward
Ferro is certainly in a bind since its unprofitable operations don’t provide sufficient funds to improve its weak financial position. While the company has previously used asset divestitures to lower debt, one-time asset sales are not a viable long-term strategy and won’t lead to necessary gains in operating cash flow. To compete with the industry giants, Ferro Corporation (NYSE:FOE) really needs to partner with a competitor to generate meaningful operating synergies.
Fellow chemical manufacturer A. Schulman Inc (NASDAQ:SHLM) is certainly open to a business combination, already announcing an offer to acquire Ferro for $6.50 per share, or roughly $530 million. A tie-up between the two small specialty chemical producers would create a more diversified company capable of withstanding the industry’s business cycles, with leading products in the glazes, color concentrates, and high-performance plastic components areas. It would also provide more solid financial footing for Ferro Corporation (NYSE:FOE), given Schulman’s conservative use of debt.
In FY 2013, A. Schulman Inc (NASDAQ:SHLM) reported mixed financial results, with a 4.9% increase in total sales but an 18.1% decline in operating income. While the company achieved higher sales during the period due in part to 2012 acquisitions, its gross profit was hurt by price weakness in its specialty powder segment.
In response, management has embarked on cost-savings initiatives, including closing duplicate facilities and re-focusing on higher value technical-product lines. A. Schulman Inc (NASDAQ:SHLM)’s proactive strategy should allow the company to maintain solid profitability while it pursues growth avenues such as engineered plastic for the medical device and 3D-printing industries.
Another way to go
Alternatively, investors might want to consider an intriguing company that competes in the same chemical businesses but that also has exposure to construction and energy segments. Despite its current position in Chapter 11 proceedings due to legacy asbestos litigation, W.R. Grace & Co. (NYSE:GRA) has been quietly improving its core operations and building on its strengths in advanced chemical agents and engineered plastics. Grace’s substantial equity value in excess of its obligations is reflected in its stock price, which has more than tripled over the past five years.
In its latest fiscal year, W.R. Grace & Co. (NYSE:GRA) posted flat top-line results, but its adjusted operating income gained a solid 7.2%. The company’s profitability was aided by a rebound in the domestic housing market and related building product purchases, where Grace competes in the waterproofing membrane and cement additive product lines.
In addition, W.R. Grace & Co. (NYSE:GRA) has leveraged its operating footprint in 40 countries throughout the world to create efficiencies in its administrative overhead. Most importantly, the company’s higher levels of operating cash flow are finally supporting growth initiatives, including new plants in India and China.
Of course, investors need to remain cognizant of Grace’s ongoing court battles. While the U.S. District Court has affirmed the company’s reorganization plan, plaintiff appeals are scheduled to be heard by the Third Circuit Court this month. Regardless of the outcome, W.R. Grace & Co. (NYSE:GRA) is clearly in the final innings of the process.
The bottom line
On its own merits, Ferro is a weak investment story, although its prospects improve in a business combination with A. Schulman Inc (NASDAQ:SHLM). Absent a merger, though, Ferro Corporation (NYSE:FOE)’s new board should be able to create incremental value by refocusing the company in areas where it has scale and a competitive advantage. However, investors might want to wait for the dust to settle in this corporate drama and set their sights on the new and improved W.R. Grace & Co. (NYSE:GRA).
Robert Hanley owns shares of Ferro and W.R. Grace & Co. (NYSE:GRA). The Motley Fool has no position in any of the stocks mentioned.
The article Can a New Board Fix This Chemical Maker? originally appeared on Fool.com.
Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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