Economy's Vigor Lifting Lubrizol

5/10/2010


  Recent Price
$88
  Dividend
$1.44
  Yield

1.6%

  P/E Ratio
10
  Shares (millions)
70
  Long-Term Debt as % of Capital
38%
  52-Week Price Range
$97.80 - $42.15

Lubrizol ($88; LZ) derives nearly three-fourths of its revenue from transportation, construction, and industrial lubricants. This cyclical market doesn’t provide much shelter from recessionary headwinds, and revenue fell in four consecutive quarters before rising in the December and March quarters. With global industrial activity rebounding sharply, investors are betting on continued growth.

The stock has risen 21% so far this year, well ahead of the S&P 1500 Index’s 6% gain. Still, the shares trade at 10 times trailing earnings, 33% below the five-year average P/E ratio of 15.

In the March quarter, Lubrizol blasted past consensus estimates, with per-share profits more than doubling on 30% revenue growth. Volumes rose 28% with no changes in prices or product mix, suggesting Lubrizol’s revenue growth reflects genuinely higher demand. Lubrizol is a Buy.

Business breakdown

Lubrizol’s additives business generated 72% of 2009 sales. Engine additives (49% of total company sales) are mixed into lubricating oil for engines. Driveline and industrial additives (23%) go into automotive transmission fluids, hydraulic fluids, and machine oils. Management sees the additives segment averaging 3% to 4% sales growth over the next three years.

The remaining 28% of revenue comes from advanced materials, performance chemicals used in consumer and industrial products. Engineered polymers (11%) include vinyl resins and compounds found in plastic piping. Consumer specialties (9%) produces chemicals found in personal-care and pharmaceutical products. Performance coatings (8%) include additives, resins, and polymers used in coatings, inks, papers, and textiles. The company expects revenue for advanced materials to grow 5% to 7% a year through 2012.

Four companies control about 90% of the $9 billion global market for lubricant additives. Lubrizol’s primary competitors are a subsidiary of Chevron ($81; CVX), a joint venture partially owned by Exxon Mobil ($66; XOM), and NewMarket ($105; NEU). With roughly 33% of the market, Lubrizol is the biggest supplier.

Conclusion

Lubrizol says it aims to deliver earnings of at least $10 per share by 2012. Management sees two-thirds of the growth coming from core operations, the rest from product-mix improvements and acquisitions. The shares fell in mid-April on reports that the company had offered to buy Germany’s Cognis, a maker of specialty chemicals and food additives. However, the weeks that followed saw no news of any deal, and the strong March quarter lifted the stock to new highs before it pulled back with the market.

In late April, Lubrizol raised its 2010 per-share-profit projection to $8.40 to $8.80 excluding charges, representing 11% to 17% growth. For 2011, the consensus projects per-share profits of $8.35, with a high estimate of $9.23 and a low estimate of $6.50. While consensus projections have not yet adjusted to reflect Lubrizol’s new guidance, the wide range of estimates provides room for outperformance. An annual report for The Lubrizol Corp. is available at 29400 Lakeland Blvd., Wickliffe, OH 44092, (440) 943-4200; www.lubrizol.com.

LUBRIZOL
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Mar '10 $2.23 vs. $1.06 + 30% $95.23 -

$68.86

13 - 9
Dec '09 1.95 vs. 0.74 + 9% 76.52 - 66.05 12 - 10
Sep '09 2.52 vs. 0.98 - 6% 72.95 - 45.73 15 - 10
Jun '09 2.02 vs.

1.26

- 18% 48.21 - 32.98 12 - 8
           
Year
(Dec.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2009 $4.59 $7.55 $1.24 $76.52
-
$23.57 10 - 3
2008 $5.03 $4.09 $1.24 61.38
-
26.72 15 - 7
2007 $4.50 $4.06 $1.20 69.95
-
48.76 17 - 12
2006 $4.04 $3.09 $1.04 50.75
-
38.03 16 - 12
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
99 96 93 90 57 82 77

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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