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Georgia Gulf (GGC) reported net income of $230.2 million for the third quarter of 2009. However, like sausage or legislation, you have to be very careful about what is going into this net income number.

Specifically: In the third quarter of 2009, Georgia Gulf successfully exchanged $736 million of its outstanding notes for 1.3 million shares of its common stock and 30.2 million shares of its convertible preferred stock. The debt exchange resulted in a $400.8 million pre-tax gain.

You really need to back out that gain for the numbers to make sense for valuation purposes. The $9 "earnings/share" number is a mirage.

Here are the Q3 numbers to focus on for now:
Operating income: $38.6 million
Interest expense: 30.7 million

A meaningful number is operating income minus interest expense: $7.9 million. This is EBT for the third quarter. That is $31.5 million annually if you multiply by four, which would be naive since Q3 is their big quarter. After tax we would be looking at about $20 million.

At $16, with a market cap of about $540 million, GGC trades at about 27x the high end of what I think are possible annual earnings. I would prefer to see a multiple of about a third of that (9x) which would put the stock at $5.33.

Author's Disclosure: I am short GGC and long GGC debt .

Source: A Careful Look at Georgia Gulf's Earnings