Iridian Asset Management Owns 6% of W.R. Grace

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A 13G filed with the SEC has disclosed that Iridian Asset Management, a special situations fund managed by David Cohen and Harold Levy, now owns 4.5 million shares of W.R. Grace (NYSE: GRA). W.R. Grace is a $5.4 billion market cap specialty chemicals company best known for its catalysts which are used to convert oil into transportation fuels. In the third quarter of 2012, Iridian increased its stake in the company by 52% to a total of 2.7 million shares; this new filing reports an increase of 67% from that level. We calculate that at the current stock price of about $71.80 per share Iridian’s position is worth over $320 million, which would make it among the largest--if not the largest, as it would have been in Q3--positions by market value in the fund’s portfolio (Find more of Iridian's favorite stocks).

In the third quarter of 2012, W.R. Grace experienced a 10% decline in revenue; this reversed the trend of top-line growth that the company had shown in the first half of the year. While W.R. Grace did reduce its COGS and SGA expenses, and margins actually improved despite the fall in sales, earnings ended up decreasing by 7%. The catalyst business, which is the largest source of revenue and responsible for over half of segment operating income, was the primary culprit: revenue and operating income there were each down close to 20%.

The markets are pricing in a recovery at the company, with the current price representing a trailing P/E of 21. Wall Street analyst consensus is for significant earnings growth in 2013 (the current-year P/E is only 16), and certainly Cohen, Levy, and their team have to be depending on an improved bottom line at the company. However, we would be wary of investing in a stock with that multiple unless it showed actual prospects of a turnaround.

Iridian had been the largest holder of the stock at the end of September in our database of 13F filings, but other hedge funds and notable investors were interested in W.R. Grace as well. Billionaire Richard Chilton’s Chilton Investment Company initiated a position of 1.4 million shares during the third quarter of 2012 (see more of Chilton's stock picks). Tiger Cubs John Griffin (of Blue Ridge Capital) and Andreas Halvorsen (or Viking Global) also had large positions in the stock. Blue Ridge reported owning 1.9 million shares (check out more stocks Griffin was buying) while Viking Global had 1.6 million shares in its own portfolio.

Other specialty chemicals companies include Albemarle (NYSE: ALB), Rockwood Holdings (NYSE: ROC), RPM International (NYSE: RPM), and Methanex (NASDAQ: MEOH). W.R. Grace’s trailing P/E of 21 places it in the middle of the range formed by these peers, with RM and Methanex trading at 25 times their trailing earnings (though current-year estimates put those stocks in the same range as W.R. Grace in terms of valuation) and the other two stocks being cheaper. Specifically, Albemarle carries trailing and forward P/Es of 18 and 11, respectively, while Rockwood’s trailing P/E is 10 with a significant decline in net income expected for this year. Albemarle’s earnings were down 62% last quarter versus a year earlier, but apparently as with many of these other chemical companies the business is expected to bounce back in 2013. We would note that as a general pattern most of these stocks have high betas, since the demand for chemicals is dependent on the broader economy. W.R. Grace and Albemarle, for example, have betas of 1.8.

We’re not sure what the Iridian investment team sees in W.R. Grace. It’s possible that the company is in a period of transition and that its business will improve going forward, but for now we would not call it undervalued and, as a result we would avoid the stock.


This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Rockwood Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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