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Value Line recently initiated coverage of Rockwood Holdings, Inc. (ROC) in its flagship product, The Value Line Investment Survey. The company develops and manufactures high-value specialty chemicals for industrial and commercial applications across a wide range of industries and regions. Based in New Jersey, it employs over 10,000 workers. Most of Rockwood’s business is derived from the United States or from Germany and other European markets.

Among the many chemicals and applications it deals with, most of Rockwood’s revenues come from Surface Treatments (21% of 2012 sales), Performance Additives (21%), and Advanced Ceramics (16%). The company is pretty well insulated from overexposure to any one region or client, as no end-market user makes up for more than 17% of total sales. True, Rockwood services a wide range of industries, notably the Chemicals and Plastic market, as well as the Automotive, Electronics, and Construction industries, among many others. This diversity should help Rockwood thrive into the future, as weakness in one area could theoretically be made up for in another.

Rockwood’s operations are constantly threatened by internal and external risk factors. For one, as a large chunk of its business is conducted in Europe, unfavorable exchange rates often impede profit growth. The company’s debt level is somewhat troubling too. This could hurt Rockwood in the future should it attempt to finance acquisitions or other moves, as debt payments would take precedence. Thus, we think the company’s free cash flow will face pressure indefinitely. Management is currently addressing this issue directly through divestitures (discussed below).

In addition, the regulation of many of the raw materials and chemicals Rockwood works with presents another major risk to its business. With constant scrutiny being placed on emissions and toxic wastes, the company is constantly monitoring and dealing with regulatory trends that could threaten operations.

So far this year, Rockwood stock has had a nice run. In fact, ROC shares have climbed more than12% since the start of 2014. Even so, the near-term picture, we believe, will be challenging. For one, Rockwood is in the middle of a restructuring. In an effort to streamline operations, it has recently agreed to sell several of its businesses. The largest of these is Titanium Dioxide Pigments, which accounted for 25% of 2012 sales. Many of the pending divestments have already been factored into the company’s reports as discontinued operations, and readers should note that the company’s results and estimates hereafter appear significantly lower than previous years. This does not underscore weakness in companywide operations, though, as we believe Rockwood will be able to better focus on its core product lines and fund its quarterly dividend program. Consequently, looking past the imminent near-term hurdles associated with the restructuring, we think the company’s long-term prospects are solid.

Subscribers interested in owning a piece of  this large-cap specialty chemical manufacturer are advised to consult Value Line’s quarterly reports for Rockwood Holdings, as well as any supplemental reports and relevant articles as important news items arise.

At the time this article was written, the author did not have positions in any of the companies mentioned.