Adding a Shot of Earnings Growth

06/03/2010 12:04 pm EST


Charles Carlson

Editor, DRIP Investor

Charles Carlson, editor of The DRIP Investor, says a leading maker of additives has shown strong revenue and profit growth and its share price is attractive.

One firm that is seeing a strong rebound in its end-user markets is Lubrizol (NYSE: LZ). The company, a provider of additives for industrial and automotive lubricants, has posted per-share profits over the last three quarters that are more than double the profits from the same year-earlier period. Revenue growth has picked up as well, with sales rising 30% in the March quarter.

Lubrizol’s additives business generates around three-quarters of total sales. Its biggest exposure is engine additives, representing roughly 50% of total sales. The firm also offers additives used in lubricants and fluids for industrial and construction markets. The firm controls roughly one-third of the global market for lubricant additives. The company also produces advanced materials and performance coatings used in a variety of sectors, from textiles to pharmaceuticals.

Given its exposure to cyclical industries, it is not surprising that Lubrizol’s sales declined 9% in 2009. However, quarterly revenue comparisons turned for the better in the December quarter and grew nicely in the March period, with revenue rising 30%.

Profits were quicker to rebound, with improvement starting in the June 2009 quarter. The bottom line has been especially strong in the last three quarters and should show continued gains for 2010. Overall this year, the consensus earnings estimate is $8.63 per share, up 14% over 2009 results.

Given that Lubrizol has handily beaten estimates in the last two quarters—the company’s March-quarter per share profits were nearly 21% better than the consensus estimate— that $8.63 per share number may prove conservative. Long term, overseas growth, especially in China, where the firm is building a new plant, should drive growth.

The strength in profits has helped fuel a dividend increase. The firm is boosting its quarterly dividend 16% to [36 cents] per share, payable June 10th. The increase reflects the company’s “confidence in its earnings and cash flow performance.” With the dividend increase, the current yield is 1.7%.

Lubrizol offers the attractive combination of strong operating momentum and a reasonable valuation.

Lubrizol’s profits’ beating Wall Street estimates has helped these shares move higher over the last 12 months. However, the stock still trades at a reasonable ten times the 2010 consensus earnings estimate. (It closed Wednesday below $89—Editor.)

The firm’s sensitivity to cyclical industries does lend some risk to these shares, especially if the economic recovery stalls. However, investors who are underweighted in economically sensitive issues should give these shares strong consideration.

To be sure, a sustained market downturn will take some steam out of these shares. However, investors could nibble at current prices and step up purchases in the $70s. Lubrizol offers a direct-purchase plan whereby any investor may buy the first share and every share directly from the company. Minimum initial investment is $250.

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