The easy days are long over for companies that represent leveraged plays on economic growth. There may still be a feeling of general malaise and disappointment in the economic recovery, but the numbers are what they are and economic activity is strongly up off the bottoms. That represents a problem for Olin Corp (NYSE:OLN), as this chemical manufacturer has enjoyed a solid recovery from the depths of the recession, but now has to find a way to maintain the momentum.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

A Mixed Fourth Quarter
All in all, Olin's performance for the fourth quarter was fairly mixed. Revenue rose about 16% as the company offset lower volume in chloralkali and caustic potash with higher netbacks. The company's operating rate was a disappointing 70%, though, and well below industry averages for the quarter.

Profitability was a mixed bag as well. Adjusted operating income did rise 30% from last year, and the company is certainly getting some benefit from higher caustic soda prices. Still, the company is seeing significantly higher rail freight rates and that's a concern. (For related reading, see Understanding The Income Statement.)

Will Industrial Activity Lift Chemical Demand?
The third-largest caustic soda producer in the country, Olin would certainly like to see more pronounced strength in the U.S. economy. Caustic soda gets a lot of attention as an input in alumina production, but the reality is that alumina is actually a relatively small consumer of the product - sectors like pulp or paper and organic chemicals are actually much larger consumers.

Chlorine is the other byproduct of chloralkali production, and Olin is the largest merchant producer of chlorine ((companies like Dow (NYSE:DOW) actually make more but use more of it internally)). Unfortunately, chlorine prices have been weak as demand for downstream products like polyvinyl chloride (used in a lot of building products) has been soft.

Making matters worse, compared to companies like Dow, Occidental Petroleum (NYSE:OXY) and PPG (NYSE:PPG), Olin has much more reliance on rail shipment of chlorine versus pipeline. That has exposed the company to double-digit rate increases that are weighing on profitability.

Winchester Always a Wildcard
Olin's Winchester ammunition business is doing reasonably well right now. The trouble is that this business is surprisingly variable. Not only are companies like Olin and Alliant Techsystems (NYSE:ATK) looking at lower military ammunition demand as overseas operations wind down, but the consumer market is strangely cyclical.

To wit, there was a spike in demand starting with Obama's election victory as rumors spread that the new administration would somehow curtail gun ownership. With demand apparently so subject to emotion, it's always a bit of a wildcard.

The Bottom Line
Fellow chemical company Westlake (NYSE:WLK) has brought a bit more attention to the sector recently with its hostile bid for Georgia Gulf (NYSE:GGC). Unfortunately, it doesn't change the basic realities of the market - one of the biggest being the extent to which companies like Olin can enforce price increases.

Trading at around six times 2012 estimated EBITDA, Olin shares look fully valued today. While this can be a very good stock to ride out of recessions, once the recovery growth rates start to flag, the stock tends to flatten. With better mid-cycle ideas out there, investors can let this one go by. (For related reading, see A Clear Look At EBITDA.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center