It’s hard to get excited about the chemical industry, but sometimes the best stocks lie in the most mundane places. The industry as a whole has been on fire, with the big names like Dupont (DD) and Dow Chemical (DOW) trading at or near new 52-week highs. This is a highly cyclical industry, so it’s impressive how these stocks have been performing. Clearly there is optimism that the economy will turn higher and that growing emerging market countries like China will continue to demand more raw materials to fuel its growth. However, my favorite stock has growth prospects that far exceed those of the bigger names. Meet Lubrizol (LZ).
Specialty Maker
The company is actually specialty chemical maker, which is a higher area of growth. According to Yahoo! Finance, Lubrizol produces and supplies technologies that improve the performance of its customer?s products in the transportation, industrial, and consumer markets worldwide. The company operates in two segments, Lubrizol Additives and Lubrizol Advanced Materials.
Lubrizol will report earnings this week, and I expect another stellar report. It’s always risky to write about a stock right before it releases earnings, but I feel confident the company will not disappoint. Part of my confidence comes from the fact that it exceeded estimates in its last quarterly report by 50 cents, and sales also boomed by 26%. Companies with strong earnings momentum tend to beat estimates quarter after quarter.
So what do analysts expect for the quarter? The current consensus calls for $2.65 per share, which is up from $2.19 90 days ago. The company has exceeded estimates in three straight quarters by double digits, which is one of the main reasons for my confidence in the current quarter. If history is a guide, the company could do north of $3.00.
Analysts are also speculating on what the company could do with its cash hoard that is approaching $2 billion. The usual options are on the table such as an acquisition, a share buyback or a special dividend. Of course this is a terrific problem to have and whatever is done is likely to increase shareholder value.
The stock is currently trading at 11.4x current-year estimates of $10.05 per share. This estimate will likely increase as the year draws to a close. Given rising earnings estimates and improving fundamentals, I wouldn’t be surprised to see this stock hit $150 within a year.
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