Seeking Alpha: PolyOne Has A Great Business, But Is It A Great Stock?

With the major market indices having performed as they have this year, it's not exactly surprising that there are numerous situations where you see a good or great business with a stock up 40%, 50%, or 60%-plus over the past year. Such is this case with PolyOne (POL), as investors have bid up the shares of this chemical company not only on expectations of improving construction and transportation markets, but also its clear commitment to transitioning to a higher-margin specialty chemical model.

Valuation admittedly always comes down to elements of guesswork and judgment, and arguments over the "right" multiples or discount rate for PolyOne can lead to pretty significant swings in estimated fair value today. Even so, it's hard for me to still call PolyOne a great stock for new investors at this level, as a lot of the company's plans and intentions seem to be already incorporated into expectations.

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PolyOne Has A Great Business, But Is It A Great Stock?

Investopedia: Buffett Brings Lubrizol Into The Fold

Buffett-spotting is practically a cottage industry in the financial media, as is predicting the next thing that the Berkshire Hathaway (NYSE:BRK.A) CEO is going to buy. These predictions tend to be consistently off the mark, though, and so there is almost always an element of surprise to Buffett's next buy. So too was it with Monday's announcement that Berkshire Hathaway would acquire Lubrizol (NYSE:LZ) - while the deal makes a great deal of sense, precious few people were publicly predicting this one. (Check out some of Buffett's other surprise picks in 4 Lesser-Known Companies Buffett Owns.)

Berkshire Hathaway Buys Lubrizol  

Buffett is striking the kind of deal here that he prefers - an all-cash transaction for 100% control. Berkshire Hathaway will be paying $135 per share in cash for all of Lubrizol's outstanding shares. Including Lubrizol's net debt, this is a $9.7 billion transaction for Berkshire Hathaway - and a 28% premium for Lubrizol shareholders. All in all, shareholders who bought or held Lubrizol through the worst of the recession have seen these shares come back more than fives times over since early 2009.

What Berkshire Hathaway Is Getting 

Lubrizol is a chemical company, but it is not so much a commodity player like Huntsman (NYSE:HUN) or Westlake (NYSE:WLK). Instead, Lubrizol focuses on additives and advanced materials. Lubrizol has a leading share in additives for products like motor oil, gear oils and transmission fluids, as well as significant businesses in engineered polymers, performance coatings, and so on.

Although many chemical companies struggle to attain a double-digit return on equity, let alone maintain it, Lubrizol has done quite well by this metric. Likewise, although Lubrizol was not immune to the effects of the recession, the company has shown a relatively uncommon ability to deliver consistent revenue growth compared to other chemical companies. (For more, see How Return On Equity Can Help You Find Profitable Stocks.)

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Investopedia: RPM Still has Some Horsepower

If a company can do alright in the midst of a terrible end-user market, it stands to reason that the company should do pretty well when the eventual recovery comes. That could well be the thesis for investors looking at RPM International (NYSE:RPM) these days. While the residential real estate market has been a disaster recently, and the commercial market has not exactly been muscular, the company has continued to produce free cash flow. With a bevy of well-known brands, this should be a company in line to benefit from an eventual real estate and construction rebound. 

The Quarter That Was 
Although things might get better someday, that day has not come yet. Sales were up 5% on a pro forma basis, with all of the growth coming from the company's industrial business. Industrial sales climbed about 8%, with more than half of that growth from organic improvement. By comparison, the consumer segment declined about 0.6%, with organic "growth" down more than 1%. For the company's fiscal second quarter, industrial was more than 70% of the company's sale base.

In point of fact, 5% growth actually compares pretty well to the company's historical average revenue growth rate, so investors really do not see the impact of a bad market environment until they get to the profits. Gross profit rose about 1.5% this quarter (and gross margin fell about 150 basis points), while consolidated EBIT increased a bit less than 3%.

The problem here is not that management decided to give themselves big raises or install gold-plated toilets. Rather, the issue is input costs. Companies like Dow (NYSE:DOW), DuPont (NYSE:DD), and BASF have not exactly been dropping prices lately, and RPM really does not have the leverage to push price increases through into the end-user market (particularly in the consumer segment). There's not much for the company to do, then, but eat some of those costs. (For more, see Analzying Operating Margins.)

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Industrial-Strength Performance At RPM

Specialty chemicals is one of those catch-all categories that seems convenient but is actually pretty worthless in practice. Cytec (NYSE:CYT), WR Grace (NYSE:GRA), Solutia (NYSE:SOA) and RPM International (NYSE:RPM) all carry this label, but the similarities are few and far between apart from a general exposure to rising input costs. Nevertheless, looking a little deeper sometimes pays off, for while RPM needs a better housing market to really do well, the stock could be an attractive dividend-plus-capital-gains story for patient investors. 

The Quarter That Was
RPM's fiscal first quarter results require a little bit of explanation. As reported, sales were down about 2%, but this is a case where "as reported" is not very accurate. The company elected to deconsolidate its Specialty Products Holding Company subsidiary and allow it to go into bankruptcy to help resolve asbestos liabilities. Not only does that take away some units like Day-Glo and Dryvit, but it also makes historical comparisons misleading. 


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