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Stepan Company Cleans Up
Bob Doll, chief equity strategist for fundamental equities at BlackRock, a global investment management firm, recently wrote an op-ed piece for the June 8 Wall Street Journal (you can read it here). In it, he makes the case for investing in U.S. America
One of those continues to be Illinois-based Stepan Company (NYSE:SCL), a small-cap maker of cleaning compounds and other chemicals. Its stock is up 50% in the last 52 weeks, and momentum is clearly in its favor. Here we'll look at how this company keeps the sparkle in its earnings.
IN PICTURES: 6 Ways To Save Money This Summer
Shareholders Clean Up
According to Validea.com, Stepan's free cash flow yield is 15.4%. Bruce Berkowitz, Morningstar's domestic fund manager of the past decade looks for stocks higher than 10%. The interesting thing about Stepan is it's only recently become a free cash flow dynamo. Prior to 2010, it had never generated more than $25 million. What's the cause of its sudden success? Greater profitability. In 2007, its total revenues were $1.33 billion, $53 million more than in 2009. Yet its operating profit was $69.8 million less, a difference of $6.40 per share. The good news translates into a 104.7% total return to shareholders since the end of 2007. In comparison, the S&P Small Cap 600 was down 19.5% over the same 30 months. If the first quarter is any judge, it looks like this company is poised to continue making money.
Top 5 Cleaning Products Companies
Squeeky Clean Earnings
Stepan's first-quarter earnings per share was $1.88, 45 cents better than Q1 2009. The one analyst estimate for 2010 is $5.28 a share. It did $5.84 in 2009. This means the analyst believes it will generate just $3.40 in the remaining nine months. Considering it bettered its first quarter year-over-year earnings by 31.5%, I find it hard to believe its earnings would drop from $4.41 a share (what it did Q2-Q4 2009) to the $3.40 I've referenced above. In addition, it indicated in its quarterly report that it would continue to grow profits in the coming months thanks to new investments it has coming online inBrazil Germany
Tidy Debt Ratios
About the only number to drop in Stepan's financial statements is its net debt, which is a great problem to have. At the end of the first quarter, it held $27.7 million in net debt (total debt less cash) compared to $125.3 million a year earlier. In its Q1 press release it indicated it would add an additional $40 million in long-term debt in the second quarter for potential acquisitions and capital expenditures, bringing its net debt level to 54%, what it was a year ago. I'm thinking that the company will probably trim that number down as the year moves along and its profit picture becomes clearer. There's an old saying that a good time to borrow money is when you don't necessarily need it. Stepan doesn't. This says to me that management wants to keep the pedal to the floor and is confident in its future. You have to like that.
Bottom Line
Stepan is an excellent company. If you're looking for a good small cap pick, this company may be worth a closer look. (For related reading, see Small Cap Research Can Have Big Impact.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
One of those continues to be Illinois-based Stepan Company (NYSE:SCL), a small-cap maker of cleaning compounds and other chemicals. Its stock is up 50% in the last 52 weeks, and momentum is clearly in its favor. Here we'll look at how this company keeps the sparkle in its earnings.
IN PICTURES: 6 Ways To Save Money This Summer
Shareholders Clean Up
According to Validea.com, Stepan's free cash flow yield is 15.4%. Bruce Berkowitz, Morningstar's domestic fund manager of the past decade looks for stocks higher than 10%. The interesting thing about Stepan is it's only recently become a free cash flow dynamo. Prior to 2010, it had never generated more than $25 million. What's the cause of its sudden success? Greater profitability. In 2007, its total revenues were $1.33 billion, $53 million more than in 2009. Yet its operating profit was $69.8 million less, a difference of $6.40 per share. The good news translates into a 104.7% total return to shareholders since the end of 2007. In comparison, the S&P Small Cap 600 was down 19.5% over the same 30 months. If the first quarter is any judge, it looks like this company is poised to continue making money.
|
Company |
Market Cap |
Free Cash Flow Yield |
|
Stepan Company (NYSE:SCL) |
$635.9M |
15.4% |
|
Darling International (NYSE:DAR) |
$597.7M |
9.4% |
|
Church & Dwight (NYSE:CHD) |
$4.4B |
9.1% |
|
Clorox (NYSE:CLX) |
$8.7B |
6.2% |
|
Ecolab (NYSE:ECL) |
$10.5B |
4.2% |
Stepan's first-quarter earnings per share was $1.88, 45 cents better than Q1 2009. The one analyst estimate for 2010 is $5.28 a share. It did $5.84 in 2009. This means the analyst believes it will generate just $3.40 in the remaining nine months. Considering it bettered its first quarter year-over-year earnings by 31.5%, I find it hard to believe its earnings would drop from $4.41 a share (what it did Q2-Q4 2009) to the $3.40 I've referenced above. In addition, it indicated in its quarterly report that it would continue to grow profits in the coming months thanks to new investments it has coming online in
Tidy Debt Ratios
About the only number to drop in Stepan's financial statements is its net debt, which is a great problem to have. At the end of the first quarter, it held $27.7 million in net debt (total debt less cash) compared to $125.3 million a year earlier. In its Q1 press release it indicated it would add an additional $40 million in long-term debt in the second quarter for potential acquisitions and capital expenditures, bringing its net debt level to 54%, what it was a year ago. I'm thinking that the company will probably trim that number down as the year moves along and its profit picture becomes clearer. There's an old saying that a good time to borrow money is when you don't necessarily need it. Stepan doesn't. This says to me that management wants to keep the pedal to the floor and is confident in its future. You have to like that.
Bottom Line
Stepan is an excellent company. If you're looking for a good small cap pick, this company may be worth a closer look. (For related reading, see Small Cap Research Can Have Big Impact.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Will Ashworth
Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.
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