Innospec Seeing A Hiccup In Margins, But The Core Business Looks On Track

Specialty chemical companies have continued to do alright this year, as volumes and pricing have helped partly offset increasing raw material pressures. Innospec (IOSP) has been a bit of a laggard since May, though, with the company’s second quarter report hurting the share price as investors didn’t like the weaker than expected margins in the business. I had thought Innospec looked a little pricey when I last wrote about the company, but I do see some upside here as I expect the company to benefit from some lagging pricing actions. If Innospec can get the Oilfield business in better shape, there could be more meaningful upside.

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Innospec Seeing A Hiccup In Margins, But The Core Business Looks On Track

Innospec Offers More Upside On Growth And Margins

The last year or so has been a choppy one for Innospec (IOSP), as volumes and price/mix have been choppy across the business and the company absorbs the lower-margin business it acquired from Huntsman (HUN) at the end of December 2016. As far as peer comparisons go, Innospec is a tricky stock to benchmark given its mix of businesses, but I’d call its performance since October of 2016 “middle of the pack,” with companies like NewMarket (NEU) and Solvay (OTCPK:SOLVY) doing worse and companies like Ecolab (ECL), BASF (OTCQX:BASFY) and Lonza (OTCPK:LZAGY) doing better.

Looking ahead, I believe it will be quite a while before the electric vehicle revolution materially impacts the fuel specialties business, and I think the company has a long growth runway for its performance chemicals business. Its oilfield chemicals business should continue to benefit from improving U.S. onshore activity, while the octane additives business will continue to exist in a regulatory twilight zone.

If Innospec can generate mid-single-digit revenue growth and drive FCF margins back toward 10% on sustained improvements in the performance and oilfield chemical businesses, a fair value in the low-to-mid $70s seems reasonable and can support a long position today.

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Innospec Offers More Upside On Growth And Margins

Seeking Alpha: Innospec Continuing To Build A Quality Business From A Small Base

While Innospec's (NASDAQ:IOSP) foray into oilfield chemicals has run smack into price-related activity declines in North America, this small specialty chemical company continues to leverage a strong fuel additives business and a growing value-added personal care performance chemicals business. With the balance sheet flexibility to add more specialty business lines and a reasonable valuation, this company should still be look forward to above-average growth and margin leverage prospects.

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Innospec Continuing To Build A Quality Business From A Small Base

Seeking Alpha: Sluggish European Demand May Be Opening A Window Into Innospec

I've liked specialty chemical company Innospec (NASDAQ:IOSP) as an operating entity for some time, but I've been less excited about the stock given its valuation. The shares are now down more than 20% from my initial write up and down a similar amount since my last write up, though, and that makes the risk-reward balance more interesting. While I do have some concerns that demand in Europe for the company's fuel additives will weaken further, I like the long-term outlook for the company's oilfield chemical and personal care performance chemical operations.

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Sluggish European Demand May Be Opening A Window Into Innospec

Seeking Alpha: Still Waiting For A Better Entry Point On Innospec

When you find a chemicals company that can routinely post double-digit returns on assets and invested capital, it's worth paying attention. Likewise, not many $1 billion companies can get meaningful share in markets when competing against behemoths like the chemical operations of Exxon Mobil (XOM) and Chevron (CVX), or Berkshire Hathaway's (BRK.A) Lubrizol. Now, with Innospec (IOSP) making it clear that growing its oilfield chemicals business is a priority, I'd say the story is getting better.

Valuation still remains an issue. I've liked Innospec as a company for quite some time, but as I observed about six months ago, the valuation was and is fairly demanding. The stock hasn't done much in the interim, and I'm likewise concerned that investors buying today may be facing a wait as the company "grows into" its valuation and as the market expects more moves to build the oilfield operations.

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Still Waiting For A Better Entry Point On Innospec

Seeking Alpha: Innospec Looking To The Next Run

Specialty chemical company Innospec (IOSP) has been quite the stock over recent years. Up almost 40% over the last year, over 60% over the past two years, and over 600% over the last five years, Innospec has done a good job of leveraging its solid share in fuel additives and surfactants used in personal care products. Along the way, Innospec has also uncovered a pretty interesting growth opportunity in drilling/oilfield chemicals that could ultimately increase its addressable revenue opportunities by several times.

The only "but" in the story is the valuation. As strong as the markets have been, this is a familiar lament (particularly from value-oriented investors like me) and certainly not exclusive to Innospec. On one hand, I do recognize that this company is well-positioned to out-grow the average specialty chemicals company and continue to generate good margins and returns on capital. On the other hand, you do have to stretch the growth estimates and/or multiples to generate an attractive price target today.

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Innospec Looking To The Next Run

Investopedia: Will New Management Breather New Life Into Sealed Air?

Packaging isn't normally a very controversial or exciting business; it's hard to work up a lot of enthusiasm for a new type of shrink film or bottle cap. Nevertheless, Sealed Air (NYSE:SEE) has managed to make its corner of the packaging industry a little more exciting with an ill-considered deal that has already squandered meaningful shareholder capital. With new management on the way, and bringing a bold new plan, the question remains as to how much value is available in these shares.

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http://www.investopedia.com/stock-analysis/2013/Will-New-Management-Breathe-New-Life-Into-Sealed-Air-SEE-BMS-ECL-SON0102.aspx

Investopedia: Ecolab Continues A Switch From Defense To Offense

It's not uncommon for companies to transition to defensive plays as established market share, economic moats and slowing end-market growth discourages its new entrants. What's more, there's nothing wrong with defensive companies - they can enjoy solid margins and cash flows, and they often pay healthy (and reliable) dividends.

It's not so common, however, to see defensive companies aggressively seek to become more offensive. This transition not only creates a large amount of execution risk, it also demands capital that more conservative investors usually prefer to see directed towards dividends and buybacks. Nevertheless, Ecolab (NYSE:ECL) continues to push on with an acquisition program that has meaningfully altered its business mix and given it greater long-term growth potential.

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http://www.investopedia.com/stock-analysis/2012/Ecolab-Continues-A-Switch-From-Defense-To-Offense-ECL-BHI-SLB1015.aspx

Investopedia: Healthcare Services Group - Great Business ... Great Stock?

If you can reliably reduce costs for healthcare facilities, you're going to be quite popular. To that end, Healthcare Services Group (Nasdaq:HCSG) has indeed built a very appealing and scalable business in providing housekeeping, linen/laundry and dining services to healthcare facilities. While this company has a pretty compelling dividend story, the valuation is a bit confounding.

Cost Challenges Bite into First Quarter Results
Although Healthcare Services did well on the top line, cost control proved to be a more challenging situation. Revenue rose 25%, as the company continues to see solid performance in its core housekeeping/laundry services, but also impressive growth from dietary services, as more clients add these services.

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http://stocks.investopedia.com/stock-analysis/2012/Healthcare-Services-Group---Great-Business--Great-Stock-HCSG-ECL-CTAS-HCA0412.aspx

Investopedia: Paychex Puts A Damper On Investor Enthusiasm

There are no perfect metrics for judging the economy, as even widely-watched numbers like GDP and the CPI have their flaws. That leaves a lot of room for reading the tea leaves and using companies in industries like transportation, commodities and business services as proxies for all or part of the economy. 

Payroll services company Paychex (Nasdaq:PAYX) is a case in point. Automatic Data Processing (NYSE:ADP) provides useful data about payroll trends, but this company's client base is geared more towards the larger corporations; Paychex is far more focused on the small/mid-sized business community that employs many workers in the U.S. Looking at these recent results, it is still pretty clear that the recovery in the stock market is running well ahead of the recovery in the economy. (For more, see Inside National Payment Systems.)

Earnings - Good Enough, But Not Great
There is nothing in Paychex's fiscal third quarter results that suggest the economy is in any danger of overheating. Although revenue growth of 5% was slightly better than analysts expected, core payroll services growth was just 2%. The company is seeing some success in cross-selling its other HR services, and this segment showed solid 13% growth. Float earnings continue to be lackluster - earnings from this segment fell 16% on 6% higher average balances as the company continues to muddle through the low rate environment.


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Paychex Sees A Slow Road Back

There are plenty of ways in which the U.S. economy is stronger now than it was a year ago, but that does not mean that current conditions make for a rollicking good time. In particular, companies are not yet hiring in a big way, and that is keeping a lid on the recovery of payroll and HR outsourcer Paychex (Nasdaq:PAYX). 

The Quarter That Was
Paychex's fiscal first quarter seems to fit the overall sense of the economy - slight improvement here and there, but nothing close to enough strength to lift the overall sense of gloom (or at least deep concern). Revenue was up 4% (and ahead of expectations), as payroll service revenue rose almost 2% and human resources services-related revenue rose more than 10%. 


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http://stocks.investopedia.com/stock-analysis/2010/Paychex-Sees-A-Slow-Road-Back-PAYX-ADP-ECL-RHI-MAN0929.aspx

Cintas Not Scintillating

These are lousy times to be in the business of providing services to business. Whether you look at payroll and HR service companies like Paychex (Nasdaq:PAYX) and ADP (NYSE:ADP), staffing companies like Manpower (NYSE:MAN), or sanitation service providers like Ecolab (NYSE:ECL), the combination of stagnant employment and cost-cutting has been a headache for almost every player. As the leader provider of uniform rentals in North America, Cintas (Nasdaq:CTAS) is likewise caught up in that malaise. 

The Quarter That Was
All things considered, Cintas likely made the best of a difficult situation in the company's fiscal first quarter. Overall revenue growth exceeded 3%, with organic revenue growth of just under that figure. Although core uniform rental revenue was barely positive, at least it was positive, unlike the negative organic revenue performance in the prior quarter. On the other hand, the company did see solid double-digit growth in both uniform sales and document management.

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