Good Tidings for Nalco - Barron's

Nalco Holding (NLC) has made great progress taming a heavy debt load and setting a growth plan for the future. Barron's Nail A. Martin explains why the company will continue to flourish:

Nalco commands a 17% share of the $20B water-treatment market. It's three times bigger than General Electric (GE), its largest competitor in water treatment, and is the leader in its water and energy markets. Its customers are diversified and include aerospace, paper, pharmaceutical, petroleum, hospitals and schools. The company generates around 46% of its revenue from the water treatment division, and another 32% from energy services.

When J. Erik Frywald became CEO in February 2008, he laid out a three-year plan to bring down costs and debt and to reallocate resources towards higher-growth areas. Thus far, Frywald's plan has played out nicely. Nalco completed a $1.25B refinancing in May and is focused on targeting emerging markets including Russia, China and India. Nalco is also working to develop new technologies to bring customers added benefits.

Though the company hasn't entirely avoided the recession, over 80% of Nalco's revenue is recurring. H1 results disappointed some investors but cash flow for Q2 hit a five-year high of $118M, and the company is on track to exceed its full-year cost-savings target of $100M. Wall Street consensus is for earnings of $0.80 per share this year, $1.17/share in 2010 and $1.41/share in 2011, but some analysts see as much as $1.30-1.40 over the next 18 months. Applying today's P/E ratio of 15 times forward earnings would put the stock at $30 vs. a recent $18. P.J. Juvekar, a Citigroup analyst, has a one-year price target of $21.

Another vote of confidence for the stock: Berkshire Hathaway (BRK.A) owns a 6.5% stake after making major purchases of the stock in Q4 2008 and Q1 2009.

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Investors thinking about jumping into Nalco may also want to consider:

• Nalco is one of the top ten components of the Dow Jones U.S. Economic Stimulus Index, which tracks the performance of the 50 largest companies likely to benefit from the government's stimulus measures.
• China's robust growth has taken a heavy toll on its environment, a problem the Chinese government is beginning to address with its Green GDP strategy. China's Green GDP market is expected to reach $186B by 2010 and nearly $500B by 2020, and around $221B of China's recent stimulus package is earmarked for cleantech initiatives. Nalco, which is already pushing into the Chinese market, stands to benefit from this ramp-up in China's cleantech spending. Nalco already has manufacturing plants, research centers, and 554 employees in China, and recently moved its Asia headquarters from Singapore to Shanghai.