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Solutia: I’m back baby!
Solutia (SOA) manufactures specialty chemicals and other engineered materials, utilized in consumer and industrial applications. Originally formed in April 1997 by the Pharmacia Corp., Solutia was spun off to Pharmacia shareholders in Sept. 1997. On December 2003, the company filed for Chapter 11 Bankruptcy protection, seeking relief from the costs associated with litigation, environmental remediation, and pension liabilities. Solutia emerged from bankruptcy in February 2008, and is now trading on the NYSE.
Solutia is best known for Saflex, a Polyvinyl Butyral (PVB) plastic interlayer, used to make laminated safety glass for the automobile industry. In addition to being a key ingredient in automobile windshields, Saflex, and other related products, provide security, sound proofing, and ultra violet protection. Solutia also sells other glass offerings, used in the construction of commercial buildings, airports, and residential housing.
Solutia has a foot in some other promising markets, as well. The company produces various specialty films, used to make computer touch screens for hand held devices, as well as cathode ray tube and LCD monitors. There are many applications for these offerings, such as the popular Kindle and i-Pad devices.
Elsewhere, Solutia still serves the more traditional chemical markets. It offers a full line of chemicals to the rubber, solar energy, and other industries. These chemicals extend the life of rubber products and are widely utilized by radial tire manufacturers. The company also sells hydraulic fluids and solvents, used in the capital equipment, aviation, and transportation industries. One notable product, Therminol, a heat transfer fluid, is widely used in the solar energy industry. By building on this products’ success, Solutia plans to add to its share of the energy solutions marketplace.
Solutia’s top line should accelerate at a decent clip. The $1.7 billion market cap company will likely post revenues of over $1.9 billion this year, representing a considerable annual advance. The company can likely expand annual sales at about 10%-15% on average, for the next few years. Expansion in Solutia’s markets should provide the catalyst. The construction markets that Solutia serves should advance at about 8% annually, OEM Auto markets 7%, with a substantially higher rate of expansion in the solar power markets. Moreover, the company’s revenue sources are well diversified. Solutia does not rely too much on business with the U.S. government, and no one customer accounts from more than 10% of the total revenue. Currently, the United States accounts for about 26% of sales, followed by Europe, 34%, and the remainder in Asia and Other regions. The company is working to increase its exposure to fast-growing locations.
We also look for profits to start to pick up as well. The company’s largest costs are manufacturing related. Solutia has been doing a good job of operating in low-cost regions and keeping raw materials costs down. This should keep operating margins wide. Moreover, given its leading position, Solutia should be able to raise product prices, once the economy recovers.
The company spends a considerable amount on research and development. R&D spending currently runs about 15% of revenues. Although this is a variable cost, it ensures the company will remain competitive, and continue to expand its brand. The company has several patents and intellectual property trademarks. Products targeted at the renewable energy markets will likely be a top priority.
Meanwhile, Solutia is expanding through acquisition. It recently bought Novomatrix, an Asian glass manufacturer, for $73 million. Solutia also finalized its purchase of Etimex Solar, a German company, for $240 million Euros, ($294 million US). The acquisition should make considerable top-line contributions. Nonetheless, Solutia will have to be careful to manage its debt obligations. The company’s long-term debt levels remain high at about 75% of total capital. The company has about $460 million in cash and only a modest amount of debt due this year. Also, it can likely raise equity from a variety of sources, if necessary.