Koppers Holdings Inc. (KOP) recently reported better than expected results for the third quarter of 2011 on 19% sales growth and a 44% surge in EPS.
Analysts revised their estimates higher for both 2011 and 2012 off the strong quarter, sending the stock to a Zacks #2 Rank (Buy).
Koppers also pays a dividend that yields a solid 2.8%, and valuation is attractive with shares trading at just 9.7x forward earnings.
Company Description
Koppers Holdings Inc. produces carbon compounds primarily to the aluminum, specialty chemical and rubber industries and also supplies wooden railroad crossties and utility poles in North America.
The company was founded in 1912 and is headquartered in Pittsburgh, Pennsylvania.
Third Quarter Results
Koppers reported better than expected results for the third quarter on November 3. Sales jumped 19% over the same quarter in 2010 to $401.0 million. This was well ahead of the Zacks Consensus Estimate of $386.0 million.
Sales in the Carbon Materials & Chemicals segment rose 22%, while sales in the Railroad & Utility Products segment climbed 15%. Both segments saw higher volumes in the quarter.
Gross profit improved from 16.6% to 16.7% of sales in the quarter as the company was able to offset rising raw material costs through higher prices. Operating profit grew 20% year-over-year.
Earnings per share came in at $1.08, beating the Zacks Consensus Estimate of $1.02. It was a whopping 44% increase over the same quarter in 2010 due in part to a lower tax rate.
Outlook
Analysts revised their estimates higher for both 2011 and 2012 following strong Q3 results. This sent the stock to a Zacks #2 Rank (Buy).
Management stated in its Q3 earnings release that product demand continues to increase in both business segments, especially in the global aluminum and North American railroad markets.
Based on consensus estimates, analysts expect 28% EPS growth this year and 13% growth next year.
Dividend
In addition to strong earnings growth potential, Koppers pays a dividend that yields a solid 2.8%.
The company has paid the same 22 cents quarterly dividend since early 2008. Its payout ratio is a very manageable 31%, so a dividend hike could be on the horizon, especially if earnings continue to grow at a double-digit clip.
Valuation
The valuation picture looks attractive for KOP. Shares trade at just 9.7x 12-month forward earnings, in-line with the industry average but well below its historical median of 12.2x.
Its PEG ratio is only 0.4 based on 5-year EPS growth rate of 22%. That long-term growth rate may be a bit ambitious, but if you were to cut it in half to 11%, Koppers’ PEG ratio would still be below 1.0.
The Bottom Line
Koppers offers investors strong growth potential and a solid dividend that yields 2.8%. With earnings estimates rising and valuation at very reasonable levels, now could be a good time to establish a position.
Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Co-Editor of the Reitmeister Value Investor.
