Description
The value story with Great Lakes Chemical (NYSE:GLK) is twofold: first, it is a well financed, slow grower in a cyclical industry trough poised for a rebound with the economy; second, it is a turnaround play with new management undertaking major steps to reorganize the business and improve operating results. Positive signs are starting to show after their first two years in-place. A knowledgeable outsider has taken a 14% position (Berkshire Hathaway), and for you contrarians there has been a 5 year ongoing price decline in the public marketplace. Lastly, there is a resource conversion event in registration (not a show stopper but interesting nonetheless), and last year the company re-purchased nearly one third of its long term debt and over 8% of the outstanding shares of GLK common with free cash flow.
GLK is a niche speciality chemical company (bromine) with FY2000 revenues of 1.67 Billion. GLK is organized now into 4 groups; polymer additives (41% of sales), performance chemicals- mainly fire suppressants (22%), water treatment (29%), and products for the energy business (8%).
Current management was brought in from the outside by the board in 1998 to reorganize and/or recap the business. Traditionally, GLK has been a vertically integrated manufacturer of bromine and chemicals using bromine as a major additive. It listed on the NYSE in 1988. For years it was a pretty good growth story, with revenues growing from 200 million or so in the early 1980's to over a billion by the decade's end, but in this last expansion, growth has slowed/faltered and institutional support for the stock has vanished. I guess you pay "a high price for a cheery consensus". The price has been in a steady decline since 1995.
Since new management took over there have been a number of divestitures and a couple of acquisitions, most notably some businesses from FMC Corp. In 1998 they spun off Octel to shareholders, then sold for cash four other businesses for 150 million. In 1999 they IPO'd an offering of common stock in their drill fluid business (OSCA); they still retain 40% of the offering.
At year end - FY2000 (December)
Shareholder equity stood around 940 Million, with about 260 million in goodwill.
688 million in long term debt.
Cash Flow 227 million
Cap-ex 157 million
Net income 127 million
current market cap is 1.5-1.6 billion with 50.5 million shares outstanding.
My old S&P volume shows no cash flow or earnings deficit in the last recession of 1990-93. Dividends have been paid since 1973. The current dividend rate is 32 cents per share, with a 5 year average payout ratio of 20%. Management instead has focused on stock repurchases - 22.7 million shares since 1993, and 4.5 million last year alone. The average cost of last years purchases was right around $30/sh, and Berkshire was buying in the 26-29 area based on their 13G. There is approval for another 2.5 million shares to be repurchased.
GLK has just registered an offering with the SEC to use their remaining stake in OSCA to repurchase GLK common- in effect they are offering shareholders to swap GLK common for OSCA common on a subscription basis - pro-rated if oversubscribed. Each share of GLK represents .157 shares of OSCA. This should go through in the next three months.
Between the free cash flow and the OSCA swap, it is possible that shares outstanding could be reduced by another 5% plus this year, possibly as much as 10% again depending on the share conversion offer. If it is fully subscribed, outstanding shares could decline 20%.
What is wrong. Return on capital, an area that management is talking about improving, is low. Growth is anemic, although CAGR going forward is hard to predict from review of historical results because of the reorganization. Maybe the re-org with all the talk about "core" and "six sigma" is all smoke and mirrors, I don't know. Also, new management seems to have an appetite for "action", as there seems to be something "big" happening every 4-6 months whether its a spinoff, an IPO, a debt repurchase, a divestiture or an acquisition or whatever. The jury (market) seems to still be deliberating on all of this.
Summary. Cyclical specialty chem business with little threat of major foreign competition (so far). Trough Valuation. New management- very shareholder friendly. Large stock repurchases. Decent cash flow including free cash flow after cap-ex. Reasonable balance sheet. Contrary in the sense that it was once an institutional growth favorite, but now has no friends whatsoever after a brutal 5 year price slide. OSCA share offer, stock repurchases and friendly control oriented stake by Berkshire may help to put a floor in on GLK common. If economy rebounds, polymer additives will see volume and margin expansion. Meanwhile other businesses, namely water purification are growing nicely. Those of you who are "value arbs" looking for the quick 6 month flip probably will sink this idea and rate it a "1", but as a long term contrarian value play I think it's worth a look. It reminds me a bit of Nucor when it was trading in the high 20's /low 30's last year.
Comments? I'll be gone the next week but feel free to hammer at this in my absence.
Catalyst
An offer to exchange sharesof GLK common with OSCA common is in registration. That along with authorized share repurchases could reduce the outstanding amount of GLK common significantly. Berkshire has locked away 6-7 million shares, and management is shedding low ROIC business lines in favor of higher growth, higher margin business lines. Economic turnaround etc.