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From The Small and Mid-Cap Edition: Rockwood Holdings, Inc.
Rockwood Holdings, Inc. (ROC) was formed in 2000 by KKR & Co. L.P. (KKR) to acquire the specialty chemical businesses of LaPorte plc. Rockwood went public in 2005, and affiliates of KKR now control about 8% of the stock. At present, the company has five divisions: lithium (about 21% of operating profits); surface treatment (18%); performance additives (16%); titanium dioxide pigments (24%); and advanced ceramics (21%). It sells thousands of products to over 60,000 customers worldwide. In 2011, 55% of sales were to Europe, 23% to North America, and 14% to Asia.
Major markets include chemical and plastics producers (17% of 2011 sales); metal treatment and general industry (16%); automotive (15%); life sciences (13%); construction (10%); and specialty coatings (10%). The top ten customers account for just 8% of total revenues. While the cost of raw materials is a major consideration (48% of 2011 cost of sales), no single raw material represents more than 3% of the cost of goods sold.
Rockwood is the world’s leading supplier of lithium products, with about a 50% market share. Principal products include lithium salts, which are used as a fluxing agent and as cement, grease, and rubber additives; butyllithium/lithium metal, for pharmaceuticals; and battery products. The latter are used in disposable and rechargeable batteries in consumer products, such as mobile phones, computers, and power tools. Demand for lithium-based products should grow with increased production of electric vehicles (EV) and plug-in hybrid electric vehicles (PHEV).
Surface treatment products include chemicals used to clean and prepare metals for painting in the automotive, aerospace, metal-working, and general industrial markets. Surface treatments protect metals from corrosion, facilitate forming and machining, and are used to clean and maintain aircraft, which includes non-destructive testing of engines. Rockwood is opening a new plant this year in Michigan, which ought to streamline domestic production by consolidating operations. The company estimates that is has the second-largest global market share in surface treatment.
Performance additives consist of color pigments and services, timber treatments, and clay-based additives. Principal products include iron oxide pigments for coloring concrete products, pigments for paints, coatings and plastics; wood products to protect against water, fungus and insect attack, fire, and mold; and clay-based products used in industrial coatings, oil drilling fluids, and household care products. Rockwood is opening a new iron oxide plant in Georgia this year, which should help margins in this business.
Rockwood has announced plans or the intent to dispose of its two remaining segments: titanium dioxide and advanced ceramics. Titanium dioxide is a fine white powder used for its whitening and opacity in fibers, foods, pharmaceuticals, plastics, paints, ink, and paper. Advanced ceramics are used by medical, electronic, industrial, and automotive companies for sealing discs, hip joints, cutting tools, and pump and faucet components, among other uses. The company has been trying to divest the titanium business for a while and intends to get it done this year. The rumor that Rockwood is considering selling the ceramics business came as a bit of a surprise, though, given decent growth prospects. The ceramics unit could bring around $1 billion, at a normal market multiple of around six times last year’s EBITDA.
Major competitors include FMC (FMC), Cytec Industries (CYT), BASF SE (BASFY), and Huntsman (HUN). Most of these have smaller product lines than Rockwood.
Rockwood’s stock rose 26% in 2012, better than its group average, and it gained a few more points on the rumor of the divestment of the ceramics business. Still, at around 15 times this year’s forecast earnings, the stock is reasonably valued. Too, the company is committed to dividend growth. If it does sell the ceramics division, it will have a great deal of cash with which to repay debt, make acquisitions, and repurchase shares, all of which it has promised to do. It currently has board authority to repurchase $400 million worth of shares and has said it would do so in 2013. At its January 2013 investor meeting, Rockwood management stated a goal of 20% annual growth in earnings per share, from modest internal growth, margin improvement, acquisitions, and share repurchases. Even half of that figure would be quite a good long-term showing in the historically cyclical chemicals business. Meanwhile, it offers an above-average dividend yield. We think the stock would be an appropriate choice for investors seeking income and growth as well as exposure to a potential recovery in Europe.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.