Kronos Worldwide Will Hit $25 by Next Summer
Soroush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Officially a subsidiary of Valhi, Inc. (which is discussed here in greater detail), Kronos Worldwide (NYSE: KRO) produces titanium dioxide, a pigment used in the manufacturing of paint, paper and plastic. Although it is naturally white, titanium dioxide plays well with others, as it is used to mix with every other color under the sun. Over the past month, shares of KRO have returned 13.4%, outpacing the basic materials sector (0.31%), and its closest chemical-making competitors like EI du Pont de Nemours (NYSE: DD) at -0.8%, Huntsman Corp (NYSE: HUN) at 1.8%, Mosaic Co (NYSE: MOS) at 3.8%, and Ecolab (NYSE: ECL) at -7.7%. During this same time, Kronos has seen a rash of analyst revisions, particularly on the earnings front, as the company ($1.18) beat the Street’s first quarter estimates ($0.74) quite handily.
Interestingly, the stock is in the red for 2012 in total, as euro zone fears and a small group of environmental studies on the carcinogenic nature of titanium dioxide have given investors reason for pause. Despite these qualitative risks, the company looks rather attractive quantitatively speaking. In addition to its impressive Q1 earnings, the company has been growing its bottom line at a ridiculous annual rate (213.4%) since the recession. This growth has easily trumped the industry average (20.1%), and the likes of DD (18.7%), HUN (-20.9%), MOS (-5.7%), and ECL (2.0%). Supporting this expansion has been Kronos’ better than average operating (31.4%) and net (19.1%) margins, which are also better than each of its aforementioned competitors.
As is the case with many EPS high-flyers, it appears that the markets have yet to fully appreciate for this growth, as shares of KRO are currently trading at a price-to-earnings ratio (5.0X) below the industry average (15.4X), DD (13.2X), HUN (8.8X), MOS (12.9X), and ECL (39.1X). More importantly, Kronos is also trading below its 5-year (10.3X) and 10-year (11.5X) historical averages. In fact, over the past decade, the company’s earnings have traditionally traded at a 30% discount to those of the S&P 500. This year, they look to be much cheaper, trading at a 66% discount. When growth is factored into the equation, this undervaluation looks to be even more prominent, as the company sports a PEG of 0.8; typically anything below 1.0 signals a bargain.
From a macroeconomic standpoint, the chemicals industry has been relatively healthy in recent years, as aggregate revenues increased by 16.8% in 2011, after rising by 11.4% in 2010. Decreased gas prices have increased the global competitiveness of U.S. based chemical companies, as the majority of plants are run almost exclusively on petroleum and natural gas. Now, it goes without saying that there will always be inherent environmental risks to chemical producers, as mentioned above, but any windfall will be in the long term, giving ardent investors the opportunity to capitalize on cyclical growth prospects.
Going forward, analysts are expecting Kronos to finish 2012 with an EPS of $2.49, before reaching $2.53 in 2013. If consensus holds, fairly valued shares of KRO should eclipse $25 a share by next summer; they currently trade in the $17 range. WealthLift’s Sentiment Index rates KRO as a strong buy, with the overwhelming majority of the community’s users placing an “overperform” rating on the stock.
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