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.

Related Articles
  1. Stock Analysis

    What Will HP's Split Do to Its Stock?

    Read about Hewlett-Packard Enterprises, a new spinoff company from Hewlett-Packard. Understand how the two companies will focus on different markets.
  2. Investing Basics

    Learn How to Trade Semiconductor Stocks in 4 Steps

    The enormously diverse semiconductor industry requires market players looking for exposure have specialized knowledge.
  3. Stock Analysis

    The Biggest Oil Producers in Asia

    Learn which Asian countries deliver the most crude oil to market, and discover what companies are the biggest producers in each country.
  4. Stock Analysis

    The 5 Biggest Russian Oil Companies

    Discover the top Russian oil companies by production volume and find out more about their domestic and international business operations.
  5. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  6. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  7. Stock Analysis

    3 Solar Stocks to Add to Your Portfolio

    Understand the growth and challenges of the renewable energy market and its success in 2015. Learn about the top three energy stocks to add to a portfolio.
  8. Investing News

    Why the Philippines Is the #1 Source for Tech Startups & Talent

    In the last few years, the Philippines has been working diligently to re-invent itself, and that work has paid off. The Southeast Asian nation is rapidly gaining notoriety as a leading source ...
  9. Investing News

    Austin Set to Rival Silicon Valley

    Over the years, Austin, Texas has lovingly embraced its quirky reputation with the slogan “Keep Austin Weird.” Today, the capital city is attracting several tech startups and investors, making ...
  10. Stock Analysis

    The 5 Best Buy-and-Hold Energy Stocks

    Understand why energy companies' stock are volatile when oil prices are volatile. Learn about the top five energy companies to buy and hold.
  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
You are using adblocking software

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