Let’s take a look at the factors which damaged Albemarle Corporation (NYSE:ALB)’s top and bottom-line performance.
The problems
Albemarle Corporation (NYSE:ALB) has chalked out a rigid business strategy over the years by focusing on a few core areas, such as bromine products and petroleum catalysts. It enjoys sturdy competitive advantages in these areas and has a very small number of competitors, but results have been very bad over the past few quarters.
Sales in the company’s catalyst segment dipped 14% to $229.1 million. As this segment contributes almost one-third of Albemarle Corporation (NYSE:ALB)’s revenue, its overall revenue fell 8% to $634 million, missing analysts’ estimates of $741 million. The company’s departure from the phosphorous-flame-retardants business also affected the top line.
Albemarle posted net income of $82 million, or $0.97 per share, in its second quarter, falling way behind analysts’ estimates of $1.23 per share. This was a result of the drop in sales of company’s fire-safety solutions and antioxidants, which are used in numerous industries.
Three-fifths of Albemarle’s sales come from outside of the U.S. and the sluggishness in emerging economies, particularly China, impacted demand for products. Demand in Europe remained well below the prior periods. Thus, a decline in the company’s margin doesn’t come as a surprise, but will Albemarle Corporation (NYSE:ALB) bounce back in the future? Let’s find out
Making some moves
The company has been trying out various strategies to improve revenue and earnings in the future, such as price increases and entering into joint ventures. In June, Albemarle announced that it would be raising prices of dibromomethane (DBM) and bromochloromethane (PCM) by 25%. The price-hike went into effect when it was announced and might help the company rescue its dropping revenue.
It also hiked the price of Ethanox to the tune of $0.95 per kilogram in April, and I would have expected these measures to improve its revenue. But it looks like these moves are not working, as Albemarle Corporation (NYSE:ALB)’s revenue is going downhill.
The company’s Saudi Organometallic Chemicals joint venture started production at the tri-ethyl aluminum (TEA) facility in Saudi Arabia in July. The plant is expected to yield 6,000 metric tons of TEA per year. But weak economic conditions in Europe have impacted the company’s business and I’m not sure how these moves will play out.
But the company was aggressive in its share-buyback program in the second quarter, with aggregate repurchases to the tune of roughly 10% of shares outstanding. This, along with the previously announced 20% increase in the dividend, speaks of Albemarle’s commitment to returning capital to shareholders even though it is taking a hit of late.
Other options
Albemarle competes with W.R. Grace & Co. (NYSE:GRA), Chevron Corporation (NYSE:CVX) and a few private players in the refinery-catalyst segment.
W.R. Grace & Co. (NYSE:GRA) generates roughly 40% of its revenue through selling catalysts and the remaining 60% from different construction and industrial products, thereby helping it to diversify. So those who are looking to benefit from the growth in the construction and industrial markets in the U.S. might opt for W.R. Grace & Co. (NYSE:GRA) instead of Albemarle Corporation (NYSE:ALB). The company’s diversification was a reason behind its decent performance in the second quarter.
Revenue remained flat but earnings dropped slightly in the previous quarter; but the important fact is that the company is profitable and its diversified business is helping. So it does not come across as a surprise that analysts are expecting W.R. Grace to grow earnings almost 16% next year, giving it a forward P/E of 16 against the trailing P/E of 68, which means that solid growth is expected by analysts.
Chevron Corporation (NYSE:CVX) is an integrated energy company with exploration and refining operations across the globe. Its chemicals business is not big enough to make a dent in its overall performance, but since we are discussing companies that compete with Albemarle on some count, a look at Chevron as an investment is not out of place.
The huge size of the company and a dividend yield of 3.1% make it a solid defensive investment. Also, it is not expensive at current levels as it has a trailing- P/E ratio of 9.5 and is expected to deliver earnings growth in the next five years of 3.4%, according to analyst estimates. This might not look huge but Chevron is a robust defensive investment with a good dividend, a low payout ratio of 27% and terrific operating cash flow.
So it is clear that going for diversified companies like W.R. Grace and Chevron Corporation (NYSE:CVX) over a focused player like Albemarle is a better idea.
Conclusion
Albemarle Corporation (NYSE:ALB) has been struggling and its flat share-price performance this year reflects that fact. It pays a dividend and is buying back shares but with falling revenue and earnings, I would suggest staying away from it.
The article Stay Away From This Specialty Chemicals Company originally appeared on Fool.com and is written by ANUP SINGH.
ANUP SINGH has no position in any stocks mentioned. The Motley Fool recommends Chevron. ANUP 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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