PolyOne: Sell-Off After Resin Divestiture Creates A Long-Term Entry Opportunity

Mar.27.13 | About: PolyOne Corporation (POL)

Shares of PolyOne Corporation (POL) fell 1.8% in Monday's trading session. The provider of specialized polymer materials and associated services and products announced the sale of its non-core Resin assets. Shares continued to slip, trading with losses of a similar percentage in Tuesday's trading session.

The Deal

PolyOne announced that it has agreed to sell its vinyl dispersion, blending and suspension resin activities to Mexichem S.A.B. for $250 million in cash.

The activities were part of PolyOne's Performance Products and Solutions business. While the deal has a short term dilutive effect, the company stresses that the deal is consistent with the company's mix improvement strategy which has delivered significant shareholder value already in recent years. CEO and Chairman Stephen D. Newlin commented on the deal:

Since we began our specialty transformation, we have divested commodity equity investments including Oxy Vinyls in 2007 and Sunbelt in 2011 and reinvested the proceeds to accelerate the growth of our specialty offerings. As our only remaining business involved in the direct manufacture of base resins, we view the sale of our resin production assets as a natural and next step in the evolution of our portfolio.

The activities generated annual revenues of $147 million in 2012, valuing the deal at 1.7 times annual revenues. The sale will have a dilutive effect of approximately $0.22 per share and is subject to regulatory requirements and normal closing conditions.

Despite the dilutive effect of the sale, PolyOne remains committed to its 2015 earnings target of $2.50 per share. While the deal will result in short term dilution, the company thinks it is in the best interest of all stakeholders to focus on its core operations.

Valuation

PolyOne ended its fiscal year of 2012 with $210 million in cash and equivalents. The company operates with $707 million in short and long term debt, for a net debt position of approximately $500 million. The company generated full year revenues of $3.0 billion, up 4.5% on the year before. Net profits more than halved to $71.9 million, or $0.80 per diluted share.

The market currently values PolyOne around $2.2 billion. This values the firm around 0.7 times annual revenues and 30-31 times annual earnings. PolyOne currently pays a quarterly dividend of $0.06 per share, for an annual dividend yield of 1.0%.

Some Historical Perspective

Long term shareholders of PolyOne have seen great returns, as the company has changed its strategy to focus on core assets. After trading in a $5-$10 trading range in the years 2003-2008, shares fell to lows of $1 in 2009 amidst the recession. The recovery and successful strategy have gradually sent shares higher, currently exchanging hands around all time highs around $24 per share.

Between 2009 and 2012, PolyOne has rapidly increased its annual revenues from $2.1 billion to $3.0 billion. Net income rose from $106.7 million in 2009 to peak at $172.6 million in 2011, before falling back to $71.9 million over the past year. The company retired some 5% of its shares outstanding over the past year.

Investment Thesis

Investors are not applauding PolyOne's deal given the dilutive effect of the transaction. The $250 million price tag values the assets at 1.7 times annual revenues, compared to PolyOne's own valuation at 0.7 times annual revenues. The dilutive effect of the deal seems large, as a $0.22 per share dilution implies that earnings will fall by some $20 million. As such, the dilutive effect implies that the deal values the resin assets at around 12-13 times annual earnings.

As such, it is understandable why investors are selling their shares of PolyOne in a response to the announced deal, given the short term dilutive effect of the transaction. Yet investors should give management credit and the benefit of the doubt. The transformative strategy of the firm has already resulted in tangible improvements in revenues and profits in recent years, and has propelled the share price towards all time highs.

Comforting, should be the comments from management which reiterated the $2.50 per share earnings target for 2015, despite the dilution of the resin deal. As such the deal is just a short-term hiccup in PolyOne's long term strategy which is still very sound. The proceeds of the sale will furthermore allow the company to reduce its already acceptable debt position, or boost payouts to investors by means of higher dividends of continued share repurchase programs.

Long term investors should be attracted to these recent sell-offs. Shares trade a little than 10 times 2015's expected annual earnings, while the balance sheet of the company is solid and the long term strategic plan has already created a lot of shareholder value in recent time periods.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.