Risen from the Ashes?

09/04/2008 12:00 am EST


George Putnam

Editor, The Turnaround Letter

George Putnam IV, editor of the Turnaround Letter, finds a promising chemical company that emerged from Chapter 11.

Solutia (NYSE: SOA) is a global manufacturer of specialty chemicals and polymer-based materials.

Solutia is now a market leader in specialty business lines that have strong growth potential. Since being spun out of Monsanto's (NYSE: MON) chemical business in 1997, it has shed its commodity and noncore businesses to focus on four segments: Integrated Nylon; Saflex (plastic interlayers for automotive and building applications); CP Films (window films), and Technical Specialties (specialty fluids). The company is the global market leader in each of these segments except nylon, where it is number two.

Most of the company's products have strong growth potential. Second-quarter revenues were up 14% over the [same quarter a year ago, and annual revenues in 2007 hit $3.54 billion]. While the company has some exposure to automotive and housing-two currently weak markets-much of that exposure is in the more stable after-markets, with only 15% of revenues coming from new auto manufacturing and residential construction. The company is considering divesting some or all of the nylon business, which has the least growth potential.

Solutia [also] is well positioned globally. Approximately 55% of revenues currently come from outside the US. Asia looks particularly strong for the company. Asian sales grew by 74% between 2004 and 2007.

[The Monsanto spin off] originally saddled Solutia with a heavy debt load as well as significant environmental liabilities. These burdens pushed Solutia into Chapter 11 in late 2003. During its bankruptcy proceedings, Solutia reduced the debt on its balance sheet and forced Monsanto to take back a substantial portion of its environmental liabilities. Solutia finally emerged from Chapter 11 with a much cleaner balance sheet at the end of February 2008.

The company has been steadily improving its balance sheet. In addition to the liabilities shed in bankruptcy, Solutia has raised additional equity since emerging out of Chapter 11 to pay down debt. It has good positive cash flow, and operating loss carry-forwards from its pre-bankruptcy days will shelter ongoing income from taxes.

Because of its checkered history with high-profile environmental problems and a lengthy bankruptcy, most investors are overlooking Solutia. As a result, they are ignoring a market leader in growing niche businesses with great potential. We recommend buying Solutia up to $22. (It closed above $17 Wednesday-Editor.)

Aggressive investors may also want to consider Solutia's warrants, symbol SLIWW, which have a strike price of $29.70 and expire in 2013.

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