Today we have a moderately speculative idea.: take shares of Olin chemical enterprise (NYSE: OLN), to capitalize on the growth in demand for its products.
Growth potential and validity: 15,5% behind 14 months excluding dividends; 9% per annum, taking into account dividends during 10 years.
Why stocks can go up: there is a demand for the company's products, and she is cheap.
How do we act: we take shares now by 53,21 $.
When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
What the company makes money on
Company's annual report for 2020 year includes losses, incurred by the company due to one-time costs, and the information presented there is not entirely objective. Therefore, we will focus on the latest report of the company, including information about the latest 9 months of her work.
According to the latest quarterly report of the company, its revenue for the last 9 months is divided into the following segments.
Chloralkali Compounds and Vinyl — 44,7%. This is caustic soda, hydrogen and other important things, needed by industrial enterprises in various industries. Segment pre-tax profit margin - 24,26% from its proceeds.
Epoxies — 36,88%. These are different coatings, like liquid, as well as hard, and filtration solutions. Margin before segment income tax — 18,64% from its proceeds.
Winchester — 18,42%. This is ammunition for small bore firearms. Also in this segment is considered the sale of solutions based on gunpowder for the construction industry. The military and law enforcement agencies only give 30,99% segment revenue, 69,1% revenue comes from the private sector. Margin before segment income tax — 26% from its proceeds.
By region, the company's revenue is divided as follows: 58,47% — USA, 19,55% - Europe and 21,98% - other, unnamed regions.
Arguments in favor of the company
Fell down. With 12 November this year, the shares fell sharply: with 64,42 to 52,72 $. So we can pick up stocks in anticipation of a rebound.
In general, everything is fine. The "chemical" part of the Olin business, giving the company more 80% proceeds, will support the ongoing industrial boom in the US - as in the idea with Westlake.
And Olin's "ammunition" business will support the steady rise in tensions in the US, which we already talked about in the idea by Smith & Wesson. So in general, Olin gives us a good opportunity to capitalize on various trends in American economic and social development..
Inexpensive. P / E at the company - 8,99, P / S — 1,05, and capitalization approx 8,46 billion dollars. In general, the listed advantages facilitate both the possibility of pumping the company's shares by investors, and her purchases by someone bigger.
Diversification. According to the annual report, none of the company's clients give her more 5% proceeds, except one. In general, this strengthens Olin's negotiating position and minimizes the risk of reporting damage in the event that one of the clients leaves..
What can get in the way
Concentration. According to the annual report, 11% Olin's revenue comes from the Dow Chemical Company - that very only customer with more than 5% proceeds. I do not think, that the Dow will scandal, demanding discounts, – although there is always such a risk with large clients. Still, logistical problems at Dow plants could negatively impact Olin, and now all major industrial enterprises in the United States and the world are suffering from this kind of difficulty..
And much more. Rising labor costs, logistics and raw materials may affect the company's reporting. Certainly, it will maximize the increase in costs in the price of its products, but here her clients have a certain limit of patience. So Olin will not be able to raise prices indefinitely.
ESG. The company's production is highly toxic, and periodically she has litigation and the appointment of compensation. But the biggest issue here is reputation.: Sustainalytics has a very low ESG rating for the company - Olin in its subgroup of chemical companies is in 409th place out of 480. This may lead to ignoring its shares by some investors., as well as adversely affect the ability to obtain loans at acceptable rates.
Accounting. Company 6,264 billion dollars in arrears, out of which 1,587 billion needs to be repaid within a year. Olin doesn't have much money at his disposal: 306,1 million on accounts plus 1,041 billion of counterparties' debts. Olin also pays dividends: 80 cents per share per year - as much 1,51% per annum, - what does it take approximately 129 million per year, approx. 13,43% from her profits over the past year. Considering the factors described above, payments can be cut in order, to pay off debts, - and the company's payouts are still quite tangible - we may fear the outcome of dividend investors.
What's the bottom line?
We take shares now by 53,21 $. And then there are two options.:
- we are waiting for the growth of shares to 61 $, who asked for them back in November. Think, we will reach this level in the next 14 Months;
- we hold the following shares 10 years - most likely, during this time, the company will be bought by some large conglomerate. Dividends will be a bonus for waiting.
But still check the news section on the company's website, to sell shares before, how investors will react to the reduction or cancellation of dividends on the St. Petersburg Exchange.
