Restructuring Hopes for a Narrow Moat
Global producer of specialty chemicals and advanced materials, Rockwood Holdings sold its titanium dioxide pigments and four other non-strategic businesses to Huntsman Corporation (HUN) in September. In the following month, the firm sold its clay-based additives, a business of the Performance Additives segment, to ALTANA Group. The impact of the mentioned divestitures on overall performance is yet to be assessed. However, analysts so far have welcomed the decisions.
The sale of non-core operations is expected to strengthen Rockwood Holdings’ market positioning. Analysts considered the decisions grant the firm a small economic moat, as focus will be driven towards the lithium segment. In that segment, the business holds an edge over its peers due to a remarkable cost advantage. In addition to lower production costs derived from the utilization of solar energy, Rockwood Holdings and Sociedad Quimica y Minera de Chile (ADR) control around half of the world´s lithium market. This is especially relevant given recent technological advances on lithium-powered hybrid and electric cars.
Rockwood Holdings’ use of solar power for its activities, besides lowering operational costs, has the additional upside of reducing exposure to the oil and natural gas industry. This is an important competitive advantage when compared with China-based industry peers. Also, the firm’s clients are considered specialty customers with which long-stable relationships have been developed. The condition of the relation has in turned helped the business model to secure a stable demand.
Financially, Rockwood Holdings was in a moderate position before the divestiture. A better picture will be seen in November 6, when a conference call and webcast will be hosted to discuss the results of operations for the third quarter. Currently trading at 38 times its trailing earnings, the stock carries a 97% premium to the industry average. And gurus have not traded in the stock recently. I share their skepticism about the stock and prefer to remain on the sidelines until the announced report is made public.
Smart Surgical Acquisitions
Producer and marketer of cleaning and sanitation products for the hospitality, health-care, and industrial markets, Ecolab continues to report improving overall performance. Growing earnings and revenues continue to back the acquisition strategy and international expansion executed by management. Rising costs for raw materials and currency fluctuations threaten to slow performance down.
In the near term, Ecolab’s bolt-on acquisitions of Nalco and AkzoNobel will drive growth through the supporting 3D Trasar cooling water technology and Purate’s franchise. Another important acquisition has been Champion Technologies, which expanded market share for its oilfield chemical segment and reduced competition for Nalco. The new added business strengthened the company’s ability to grow internationally, and management is looking has placed a greater emphasis on developing markets. However, growth is mostly expected from the Latin American region.
Concerning other geographies, Ecolab has announced a restructuring policy for operations in Europe. The aim is to improve efficiency and profitability by adjusting the supply chain and personnel to current demands. Savings are expected to amount to a total of $120 million and further improve margins. The policies should allow the firm to keep the competition at bay, while curving a difficult macroeconomic environment and offsetting currency fluctuations.
Financially, Ecolab is moderate because of a high debt related to the latest acquisitions. Currently trading at 36.6 times its trailing earnings, the stock carries an 86% premium to the industry average. Meryl Winter and Pioneer Investments however, continue to feel optimistic about the stock. I do so too but prefer to wait for the upcoming report on October 29.
High Premiums vs Prospects
Both companies hold interesting prospects; however, Ecolab’s are, to me, better founded. Also the company carries a slightly lower stock price premium and continues to deliver impressive growth. Since its stock price is not expected to drop, I would only wait for the upcoming report to have a better perspective over future plans. Last, in comparison with Rockwood Holdings, Ecolab has gone through most of its internal restructuring and is basically fine tuning a profit making machine.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.