At first glance, it probably seems fair that OM Group (NYSE:OMG) is trading at a low valuation. The company's cobalt business has seen significant price erosion in cobalt, the battery business is heavily weighted towards defense and aerospace, the electronics/chip business is terrible and the company doesn't seem to know what it wants to be.

Despite all of this, the company has good positions in growth markets, a well-respected new CFO and a relatively clean balance sheet. It is by no means the safest stock in the market today, but if OM Group can exercise on its apparent vision of becoming a leading player in multiple specialty chemical markets, the stock is too cheap today. (For more, see Earning Forecasts: A Primer.)

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

Electronics and Cobalt Not Helping
OM Group has the misfortune of being positioned in multiple markets that, quite frankly, are not doing well at all right now. The company has been on a multi-year plan of diversifying away from cobalt, but cobalt is still a significant driver of performance. To that end, cobalt prices are down about 13% from the third quarter, as there is not so much demand today in alloy markets like stainless steel or batteries.

Electronics, too, are no help. The company bought into the electronics chemicals industry with the hopes of taking advantage of the long-term growth in technology, but OM Group has not really elbowed aside The Dow Chemical's (NYSE:DOW) Rohm and Haas, Solutia (NYSE:SOA), or Albemarle (NYSE:ALB). What's worse, semiconductor orders plunged in 2011, as did pricing and demand in wind power and solar power.

Can VAC Suck it Up?
It is still very early in the story, but OM Group's acquisition of VAC is looking like a good move. This sizable deal moves the company further into specialty materials and margins have been solid as new products hit the market. Unfortunately, this is a Europe-heavy business and nobody is feeling especially chipper about Europe-heavy businesses right now. Although Germany's auto industry is doing relatively well (and that's a sizable market for VAC), how long will that hold up if Europe slides closer to recession?

Batteries - Potential, but Much to Prove
One of OM Group's relatively longer-term growth strategies has been to expand its batteries business, both in components and actual batteries. Unfortunately, the company's battery business today is heavily weighted to the defense and aerospace industry. Although commercial aerospace concerns like The Boeing (NYSE:BA) and United Technologies (NYSE:UTX) are looking good, the defense exposure is a worry. OM Group has aspirations to grow and expand into markets like medical batteries, but companies like Medtronic (NYSE:MDT) and Baxter International (NYSE:BAX) are demanding clients with long development cycles and entrenched players like Greatbatch (NYSE:GB) will not be displaced easily.

The Bottom Line
Investors have ample choice when it comes to commodity product companies trading at low multiples. What OM Group has on a company like Alcoa (NYSE:AA) or Rio Tinto (NYSE:RIO), though, is the opportunity to reposition its business into specialty markets that are less commodity sensitive. That transition doesn't come without risks; witness the relative lack of success the company has had, thus far, from its expansion into electronics chemicals.

Commodity companies often trade at a multiple of 5x to 7x forward EBTIDA. At the low end of that range, OM Group stock should be worth something in the low $30s, a pretty compelling price if things go right. Certainly OM Group needs to see better markets in electronics, steel, autos and renewable energy, but if late 2011/early 2012 represents the bottoms for those sectors, OM Group could be an interesting stock before long. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)

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

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

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!