It's hard enough to own a chemical company today, with the volatility in input costs and the wobbly state of the global economy. Factor in a sizable sales exposure to Europe, and it's not exactly surprising that Rockwood Holdings (NYSE:ROC) is off its best levels. Nevertheless, with solid exposure to growth markets like lithium and advanced ceramics, and management's plans to monetize non-core assets actively, these shares may be worth a look for investors that are more aggressive.
Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.
Titanium About to Go Bye-Bye?
Earlier this year, management confirmed what many investors and analysts had been speculating on for some time - the company is going to look to dispose of its titanium dioxide business. While the company had looked to sell this business (which it co-owns in a JV structure with Kemira), it doesn't look like there was much demand. As a result, the company is going to pursue an IPO in the second half of this year.
Rockwood's titanium dioxide business isn't a run-of-the-mill commodity business. Unlike major TiO2 producers like DuPont (NYSE:DD), Tronox (OTCBB:TROX) and Huntsman (NYSE:HUN), Rockwood has focused more of its attention on anatase TiO2 products - a version that can be used in higher-value applications like synthetic fibers, food and pharmaceuticals.
While the details aren't finalized, this transaction should allow Rockwood to offload some of its debt onto the new public company, as well as using IPO proceeds, dividends and/or future additional share sales to create additional capital. Moreover, with the TiO2 market still on the way back, there is a reasonable chance that the company can see a good price in this transaction.
SEE: How An IPO Is Valued
Growth Opportunities in Ceramics
Advanced ceramics have long been a very profitable business for Rockwood, but it's also a business with some meaningful growth potential. Right now, Rockwood is the only supplier of ceramic materials for FDA-approved ceramic implants sold by companies like Stryker (NYSE:SYK) and Johnson & Johnson (NYSE:JNJ). The company is also working on ceramic materials for knee implants, and the knee implant market is considerably larger than the hip market.
Lithium a Growth Opportunity ... for Now
One of the most common stories repeated about Rockwood is its large share of the lithium market. It's a valid point; Rockwood has low-cost lithium assets in Chile and along with Sociedad Quimica y Minera de Chile (NYSE:SQM), the companies control much of the lithium market.
While lithium has a wide range of applications across many industry categories, the big story on lithium is its value in batteries. Whether it's the batteries that power Apple (Nasdaq:AAPL) phones and tablets or the batteries that power Tesla Motors (Nasdaq:TSLA) roadsters, lithium features prominently in advanced batteries today. Assuming that battery-powered, hybrid and stop-start autos continue to catch on with customers, lithium demand should remain solid.
It's worth asking if the long-term picture is so bright. I don't pretend to be an engineer or materials scientist, but I question whether lithium-based batteries are really the long-term solution to advanced battery needs. While lithium batteries are good enough for full hybrids like the Toyota (NYSE:TM) Prius or plug-in hybrids like the Fisker Karma, I'm not sure they're the long-term answer to fully electric vehicles. Nevertheless, they're the best that's available today and there's no reason to think that demand is going to fall off soon.
SEE: Clean Or Green Technology Investing
The Bottom Line
Given that a lot of Rockwood's business is still in commodity chemical/specialty chemical products, I don't believe that the company deserves the same forward EBITDA multiple as a company like DuPont. That said, even at six times or 6.5 times 2012 EBITDA, Rockwood looks undervalued today. While a further slowdown in the global economy is clearly a risk factor this company, Rockwood seems to be trying to orient itself more towards higher-value, defensible markets with more interesting long-term prospects. Accordingly, and in combination with the valuation, this is a name worth further due diligence today.
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.
Stock AnalysisA summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
Personal FinanceEven if you’re a finance or statistics expert, you’re not immune to common decision-making mistakes that can negatively impact your finances.
Options & FuturesInvesting during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
Investing BasicsHeld onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
EconomicsWill remaining calm and staying long present significant risks to your investment health?
Stock AnalysisIs DKS a bargain here?
Investing NewsA third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
Stock AnalysisHome Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
Stock AnalysisYelp investors have had reason to be happy recently. Will the good spirits last?
Stock AnalysisWalmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
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 >>
A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
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 >>
The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>