Seeking Alpha
Long only, value
Profile| Send Message| ()  

Olin Corporation (OLN) will announce earnings after the market closes on Monday January 27, 2014. Estimates range from $.24 to $.42, with the consensus estimate being $.31. My view is that Olin should meet and likely substantially beat the consensus estimate based on continuing strong ammunition sales from its Winchester division. The surge in ammunition demand should continue to add disproportionately to Olin's bottom line for several years.

Olin operates principally in three business segments: chlor alkali products, chemical distribution and small arms ammunition and components. The latter are marketed under the Winchester trade name. Chlor alkali products include chlorine, caustic soda, hydrochloric acid, hydrogen, bleach products and potassium hydroxide. The chemical distribution division manufactures bleach products and distributes caustic soda, bleach products, potassium hydroxide and hydrochloric acid. Winchester produces and distributes ammunition for sporting, law enforcement, military and industrial purposes, as well as reloading components for small arms.

Winchester competes with a number of public and private ammunition manufacturers, most notably with defense contractor Alliant Techsystems (ATK) which markets ammunition under the Federal Premium, Speer, CCI, Estate Cartridge and Blazer brands.

Winchester's principal manufacturing facilities are at East Alton, IL and at a recently built facility in Oxford, MS. Winchester is in the process of of transitioning its centerfire rifle and pistol ammunition manufacturing operations to Oxford - currently scheduled to be completed in 2016 -- where it anticipates achieving significant cost savings. Rimfire operations were previously relocated to Oxford.

Chlor alkali products have traditionally contributed to a majority of Olin's revenue and earnings. In fiscal year 2012, chlor alkali contributed 1.411 billion in revenue and $352 in Ebitda, according to the company. The newly acquired chemical distribution segment accounted for approximately one-ninth of the revenue of chlor alkali at $156 million and $10 million in Ebitda, for the partial year figure. Winchester contributed $618 in revenue and $69 million in Ebitda in 2012.

Income from chlor alkali in 2012 was 263.2 versus $245 in 2011, a 7.4 percent increase.

Winchester income was $55.2 million in 2012 compared to $37.9 million in 2011, a 45.6 percent increase. Income for 2010 for Winchester was $63 and $68.6 in 2009. Olin's 2012 10-K reported that the decrease in Winchester "income in 2011 compared to 2010 reflected the impact of higher commodity metal and other material costs ($25.1 million), higher operating costs ($15.3 million) including incremental costs associated with … relocation of the centerfire ammunition manufacturing operations to Oxford, MS, partially offset by higher selling prices ($15.7 million)." The annual report explains that the 2012 increase in income reflected the impact of higher selling prices ($20.1 million) and increased volumes ($8.2 million) ... partially offset by higher operating costs ($9.2 million), including incremental costs associated with … relocation of the centerfire ammunition manufacturing operations to Oxford, MS.

The first three quarters of 2013 has shown continuing growth in Olin's revenue and income, especially from the Winchester business segment.

For the first three quarters of 2013, chlor alkili had $1,090 million in sales with $250 million in Ebitda; chemical distribution had $326 million in sales with $21 million in Ebitda, and Winchester had $599 in sales with $120 million in Ebitda. Company-wide revenue was $1,953 million for the first three quarters compared to $2,185 million for the whole of 2012, and income was $355 million compared to $373 million for all of 2012. Income per share for the first three quarters of 2013 was $1.90, compared to $1.85 for all of 2012.

Winchester's third quarter sales were $213.1 million compared to 168.8 million in the third quarter of 2012. Its share of earnings was $40.7 million in the third quarter versus $16 million in 2012. Winchester's contribution to Olin's $.86 third quarter earnings per share - without accounting for the effect of various non-segment costs and gains such as interest, pension income, environmental expense, and unallocated corporate costs -- was $.38. Winchester's contribution to the company's earnings for the first two quarters, again without accounting for the effect of various non-segment costs and gains, was $.58 out of $1.04, or an average of $.29 for each of those two quarters.

Olin's third quarter report projected fourth quarter earnings of $.25 to $.30 based on two principal factors. First, Olin expected lower chlor alkali segment earnings compared with the fourth quarter of 2012's earnings of $54.3 million. The expected decrease in segment earnings anticipated lower pricing and decreased shipments. Sufficient data could not be found to verify if this negative outlook was in fact realized.

As to Winchester, Olin stated that fourth quarter 2013 segment earnings were expected to be "lower than the $40.7 million … achieved during the third quarter of 2013 due to the normal seasonal weakness in hunting sensitive products" but higher than the $16.5 million of earnings achieved in the fourth quarter of 2012.

Olin pointed out, however, that the surge in demand experienced in early November 2012 continued through the third quarter of 2013 across all of Winchester's commercial product offerings. As evidence, Olin pointed to Winchester's commercial backlog, $438.9 million as of September 30, 2013, compared to $138.3 million as of December 31, 2012 and $92.0 million as of September 30, 2012. Olin expects "that higher than normal levels of demand from its commercial customers will continue into the first half of 2014."

Ammunition continues in tight supply as Winchester's backlog figures demonstrate. Demand for ammunition is being driven by two related factors. First, firearm sales hit new records in 2013 as measured by FBI national instant background checks (NICS). NICS checks have increased every year since 2002 when 8,454, 322 transactions were processed. The total reported NICS checks for 2013 were 21,093,273. Although some of those new guns are going to existing gun owners, many are going to new gun owners.

Firearms manufacturers are aggressively targeting women and the concealed carry market, emphasizing the self-defense aspect of firearms ownership. With more guns in the hands of citizens, ammunition sales naturally have increased. Although in recent months gun sales have leveled off, that may be worrisome to gun makers like Smith & Wesson (SWHC) or Ruger (RGR), but not to ammunition manufacturers. The total stock of guns in civilian hands continues to increase even if at a slower rate with a corresponding increase in the need for ammunition to feed those guns.

Second, political considerations have contributed, and continue to contribute, to increased firearms and ammunition sales. Following the 2004 expiration of the so-called assault weapons ban, sales of the AR-15 platform rifle have catapulted that gun to the top selling rifle in the country. Indeed, aggressive calls for gun control following several multiple victim shootings in 2012 -- where the assailants used an AR-15 rifle -- led consumers to empty gun store shelves of that rifle on the fear that the AR-15 would be banned.

Those same fears caused a run on ammunition that likewise emptied the shelves and warehouses of ammunition suppliers as gun owners stockpiled rounds in fear of a ban or shortage. That ammunition shortage continues to date. For the more popular calibers of handgun practice ammunition, e.g., 9 mm, .38 special, .40 caliber S&W and .45 caliber ACP, availability remains severely limited, if available at all, and prices have escalated substantially. Hunting and shotgun ammunition, although still in short supply can now be found, again at higher prices. However, supplies of the most popular caliber, .22 LR rimfire ammunition, remain essentially unavailable, except from a handful of sellers charging prices two to three times the previously normal price. Having searched the various on line ammunition suppliers, I can attest that any reasonably priced .22 ammunition available from those retailers disappears from their websites within minutes.

I have no reason to doubt Olin's expectation of a seasonal decrease in hunting ammunition demand in the fourth quarter. Hunting ammunition tends to be a high priced item, but a typical hunter would not likely purchase more than a couple of boxes per season. The typical handgun owner or rifle target shooter will go through more ammunition than that in one range practice session.

With a backlog of more than $400 million it is hard to see Winchester's bottom line dropping more than a nominal amount in the fourth quarter from any decrease in hunting ammunition sales. Absent minimal contribution to earnings from its chlor alkali and chemical distribution segments, Olin should meet or beat the $.30 top range of its guidance and the $.31 consensus estimate based on Winchester's sales alone.

Winchester's substantial contribution to Olin's bottom line should continue for some time. Calls for firearm and ammunition restrictions continue in the face of periodic highly publicized multiple victim shootings. These in turn spur new purchases from citizens concerned that their right to own guns and ammunition may be subject to future restriction. A similar albeit less severe ammunition shortage developed after President Obama's 2008 election and gradually decreased through the first three quarters of 2012. If history is any guide, the current ammunition shortage should continue for at least the next two to three years.

Source: Olin Corporation's 4th Quarter Should Beat Consensus Earnings