Value Line has initiated coverage of PolyOne Corp. (POL) in its flagship product, The Value Line Investment Survey. The company is a provider of specialized polymer materials, services, and solutions. Headquartered in Avon Lake, Ohio, it provides valued added solutions to its customers, which are typically designers, assemblers, and processors of plastics. Essentially, the company links large chemical producers with plastic designers.
PolyOne was formed in 2000 from the merger of The Geon Company and M.A. Hanna Company. Today, it employs about 7,000 people at 85 manufacturing sites and eight distribution facilities in North America, South America, Europe, Asia, and Africa. Its products and services are provided to over 10,000 customers, with 67% of its 2013 sales derived domestically. With this broad customer base, no single entity accounts for more than 2% of sales.
PolyOne has five reportable segments: Global Specialty Engineered Materials; Global Color, Additives, and Inks; Designed Structures and Solutions; Performance Products and Solutions; and PolyOne Distribution. Of these, the largest is Distribution, claiming 29% of the top line. However, this has also been the slowest growing segment lately, rising just 4.4% in 2013, compared to 26% companywide growth. Global Color, Additives, and Inks is the most profitable operating segment and also achieves the top operating margins, 12% last year and rising.
To attempt facilitating advantages over its competitors, PolyOne competes on service, performance, product innovation, product recognition, speed of delivery, quality and price. Competitors are large international companies with broad and diverse product offerings all the way down to local independent custom producers that focus on a specific niche market or product. Raw material and commodity cost fluctuations could adversely affect margins. Constantly evolving products from competitors could also dim the demand for PolyOne products. At 50% debt to capital, the company is highly leveraged, but less so than was the case when Stephen Newlin took over the reins as CEO in 2006. Through available borrowing capacity and cash from operating activities, the company’s debt should be manageable and will likely be able to be worked down over time. Today, the company is much more of a specialty chemical company than the commodity company it once was. It has morphed through acquisitions and divestitures, and plans to exit what remains of its pure commodity chemical exposure.
The company is in the process of integrating Spartech, a supplier of sustainable plastic sheet, color & engineered materials, and packaging solutions, which had 2012 sales of nearly $1.15 billion. This acquisition bolstered PolyOne’s core portfolio along with adding new end markets in aerospace and security. A new segment was created as the result of the Spartech acquisition (Designed Structures and Solutions), which accommodate Spartech’s custom sheet and rollstock & packaging technology businesses. The rest of Spartech’s businesses were divided among PolyOne’s existing segments.
However, Spartech was predominantly a commodity plastic producer, so part of the integration concern will be to transform it into a more specialized company, in line with PolyOne’s direction. As such, cost of goods sold as a percentage of sales may dip during the transition. In 2014, capital expenditures are set to be used primarily for supporting sales growth and the Spartech integration and restructuring. The company is keeping an eye out for additional acquisition and synergy targets that complement its core platform, as well.
The stock’s price performance has been very good over the last 12 months, charting into new all-time high territory with regularity. Dramatic revenue growth and an outlook for aggressive earnings expansion over the next couple years are the likely catalysts for the healthy share-price gains. Effective with the January, 2014 payment, the board raised its quarterly dividend 33%, but the equity’s yield is still well below the Value Line median.
All told, subscribers interested in PolyOne Corp. are advised to consult Value Line’s quarterly reports, as well as any supplemental reports and relevant articles as important news items arise.
At the time of this article’s writing, the author did not have any positions in any of the companies mentioned.