Making Money in the Mundane (OLN)

By Stephen Brown | March 28, 2007 AAA

If you are fan of simple, pellucid business models, then you might want to peruse Olin Corp.'s (NYSE: OLN) annual report. In a nutshell, Olin is a diversified producer of clor-alkali chemicals, brass metal products, and sporting ammunition.

Clor-alkali might sound like a complicated compound, it's not. It's basically, chlorine and lye, and is used in chemical manufacturing, pulp and paper, textiles, soaps, detergents, PVC plastics, and even drinking water.

Olin is the fourth largest U.S. producer of these ubiquitous chemicals, with annual capacity of 1.24 million tons at four plants in the eastern U.S. What's more, Olin is efficient at producing the stuff. The company's operating rate in chlor-alkali for 2006 was about 92%, similar to 2005. Moreover, little new industry capacity is likely to be added for the next several years, meaning that Olin should continue to operate at over 90% capacity.

Though the lead product, clor-alkali accounts for only 21% of Olin's $3.2 billion in annual revenue, but a whopping 77% of its $150 million in net income. In contrast, Olin Brass, which produces copper and copper alloy sheet, strip, foil, tube and fabricated products, brass rod, and stainless steel, accounts for 67% of revenue and only 18% of net income. Sporting ammunition (Winchester brand) fills in the blanks.

Brass Tacks
Though not terribly profitable, Olin Brass leaves a considerable footprint in its niche. The division is the largest U.S. producer of copper and copper alloy sheet and strip. In 2001 and 2002, Olin expanded its brass business by purchasing two companies, including the largest U.S. supplier of brass rod.

Unfortunately, domestic demand for strip and rod brass in recent years has been below 2000 levels, reflecting migration to offshore locations -- a trend unlikely to reverse any time soon.

That contraction in domestic brass demand has lead to contraction in brass production. At the end of 2005, Olin operated one major integrated brass, four re-roll mills, a tube plant, a brass rod plant, and the A.J. Oster network of 10 metal service centers.

During 2006, the company closed two rolling mills facilities in Connecticut, consolidating production into its East Alton facility.

Tough Year Ahead
The outlook for Olin's chlor-alkali business isn't expected to set the world afire in 2007, either. Though volumes for 2007 are expected to resemble 2006, average industry prices are expected to be lower. What's more, the brass segment should continue to feel the adverse impact of softer demand in the auto and housing markets and relatively high copper and zinc prices.

The good news is Olin has a strong balance sheet to help weather the likely bumpy ride. Indeed, the balance sheet has improved significantly in the past two years. The company repaid $52 million of debt in 2005 and no significant amount of debt matures until 2011. The debt-to-equity ratio has declined from 63% in 2003 to 31% today, while cash increased from $190 million to $270 million.

For Dividend Lovers
As I've stated in previous missives, I like current problems, sound balances sheets, and dividends. Olin has all three. On the latter, Olin currently yields 4.9% and has paid a dividend for the past 80, putting on par with the likes of Procter & Gamble (NYSE: PG) and Exxon Mobil (NYSE: XOM).

If the past is indeed prologue, don't expect that dividend to be eliminated any time soon and do expect the business environment to eventually improve.

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