Seeking Alpha: Investors Seem To Be Expecting Too Much From H.B. Fuller

I love a good industrial story, particularly when companies can spike improving volumes and mix with better manufacturing margins. Along those same lines, I'm broadly a fan of companies whose products show up almost everywhere but don't necessarily capture much investor "mind-share". All of that said, I can't bring myself to love H.B. Fuller (FUL). I do understand that this specialty chemicals company can benefit from significant margin improvement initiatives and recoveries in key end markets like construction, but the valuation seems to be more than generous for that potential.

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Investors Seem To Be Expecting Too Much From H.B. Fuller

Investopedia: Will This Aerospace Cycle Finally Let Hexcel Take Off?

It may sound contradictory, but Wall Street is often both predictive and reactive. To that end, the stock of carbon fiber specialist Hexcel (NYSE:HXL) has done pretty well since 2009 on the basis of investor expectations for more composite material content in commercial aerospace. At the same time, though, it's well worth remembering that Hexcel has struggled to deliver consistent, impressive margins and returns on capital. If Hexcel can't find a way to establish better peak earnings and cash flow potential, it may be difficult for these shares to outperform.

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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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http://stocks.investopedia.com/stock-analysis/2011/Buffett-Brings-Lubrizol-Into-The-Fold-BRK.A-LZ-DD-ALB-FUL-ACET-CYT0314.aspx

A Royal Present For Martek Shareholders

Martek Biosciences (Nasdaq:MATK) shareholders woke up to an early Christmas present Tuesday morning, as the company agreed to sell itself to a Dutch chemical conglomerate. Although Martek is going at price that is about 50% of its all-time highs, shareholders can take some satisfaction that their board of directors managed to get a price for these shares that the market has not been willing to pay for about two and a half years. 

A Healthy DealDSM (also known as Royal DSM) (Nasdaq:RDMSY), a Dutch conglomerate that is increasingly focused on nutrition and pharmaceuticals, has reached an agreement to acquire Martek for $31.50 per share in cash. That represents a total deal price of $1.09 billion for DSM and a premium of about 35% for Martek. That also represents roughly a 10 times multiple to trailing EBITDA - a price that is pretty fair for Martek given the multiples on comparables like Givaudan, Symrise, or Croda.

A Good Deal For DSM
This looks like a completely rational and savvy deal for DSM. The company has been working hard to reduce its industrial/performance chemical exposure (over $1.6 billion in divestitures recently), while increasing its nutrition and pharmaceuticals/life sciences exposure. To that end, not only does Martek's polyunsaturated fatty acids business fit in well with DSM's infant nutrition business, but the two companies had already been working together for some time. 


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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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http://stocks.investopedia.com/stock-analysis/2010/Industrial-Strength-Performance-At-RPM-RPM-KRA-SHW-FOE-CYT-SOA-GRA1008.aspx

Recovery? Specialty Chemicals Lead The Way

Although consumers are not necessarily feeling much better yet, the recovery in the industrial side of the economy seems to be real. Over the last week or so, we have seen several large industrial concerns report strong earnings and cautiously optimistic guidance. Turning to one of the basic feed stocks of industry, specialty chemicals, we see a similar trend at work. Let's take a look at some of the top-performing
companies in this sector.

Albemarle
Albemarle (NYSE:ALB) is mostly a niche producer of specialty chemicals, but do not be fooled into thinking that "niche" is somehow a bad word. Albemarle is a leading producer of refinery catalysts, fire retardants and pharmaceutical inputs and those can be lucrative segments.

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http://stocks.investopedia.com/stock-analysis/2010/Specialty-Chemicals-Looking-Special-ALB-RPM-HXL-CYT-DD-DOW-BA0728.aspx.