Lubrizol Is Grease Of Industrial Recovery

8/10/2010


  Recent Price
$96
  Dividend
$1.44
  Yield

1.5%

  P/E Ratio
10
  Shares (millions)
70
  Long-Term Debt as % of Capital
38%
  52-Week Price Range
$97.80 - $57.94

Lubrizol ($96; LZ) doesn’t make motor oil or plastic tubing. But it does make the additives and engineered polymers found in these products.

Lubrizol controls one-third of the $9 billion global market for lubricant additives. As such, the company is heavily leveraged to the transportation and construction industries. The advanced-materials business tends to be even more cyclical and offers plenty of upside potential. Lubrizol, already a Focus List Buy, is being added to the Long-Term Buy List.

A blowout quarter

Shares bounced July 29 after Lubrizol announced it earned $2.88 per share in the June quarter, up 43% and $0.50 ahead of the consensus estimate. Revenue also topped analyst forecasts, climbing 26% to $1.40 billion. Driving revenue growth was a 19% jump in volume, higher prices, and an improved product mix.

In April, management targeted profits of $10.00 per share by 2012. However, the company could reach that goal this year. In July, the company boosted its 2010 per-share-profit guidance by $1.20 to between $9.60 and $10.00, implying growth of at least 27%. For the year, Lubrizol anticipates 12% higher volume for additives and 15% for advanced materials. Lubrizol also reiterated plans to deploy some of its $972 million (nearly $14 per share) cash hoard to buy back 7.2 million shares — more than 10% of the outstanding stock — over the next 18 to 24 months.

Business review

In the first six months of 2010, the additives segment (72% of revenue and 81% of operating income) grew sales 28%. Engine additives account for about half of the segment’s sales, while almost a quarter comes from industrial additives for such compounds as automotive transmission fluid and machine oil. The additives unit is highly sensitive to oil prices, which means Lubrizol must be able to raise its selling prices when raw-material costs rise. A price hike instituted in April appears to be holding; a second one was implemented in July.

Acquired in 2004, the advanced-materials unit makes ingredients for personal-care products, plastics used in residential plumbing and commercial sprinkler systems, and engineered polymers found in hydraulic hoses and medical tubing. In the six months ended June, sales of advanced materials (28% of revenue and 19% of profits) jumped 28%.

Conclusion

Lubrizol hopes to sustain growth by expanding in its current markets, particularly in areas outside of North America, which already account for more than 60% of its revenue. Capital spending should rise this year, with the highlight being the construction of an additives plant in China scheduled to start in the fall. We would not be surprised if Lubrizol also used some of its cash to fund acquisitions.

Shares trade at less than 10 times trailing earnings, 32% below the five-year average P/E ratio and 37% below the average specialty-chemical company in the S&P 1500 Index. 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

Jun '10 $2.88 vs. $2.02 + 26% $97.80 -

$77.65

11 - 9
Mar '10 2.33 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
           
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 $1.23 61.38
-
26.72 15 - 7
2007 $4.50 $4.06 $1.16 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
98 68 82 94 58 79 86

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


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