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Summary

  • CCF has a history of strong financial statements and even stronger recent growth rates.
  • With a fundamental and relative valuation I see some short-term price advantages.
  • Despite equity growth rates, Chase is still considered to be a bargain.

Chase Corporation (NYSEMKT:CCF) is a smallcap company that has been making protective materials for a variety of applications since the 1950s. They are, for the most part, a specialty chemical company within the basic materials sector. You will find some sites comparing them to diversified industrials. For this report they will be in a peer group of specialty chemical companies.

The selection of comparable companies

First thing I did was open the 10-K and dug out what management considered to be their "peer" group. The list contained American Biltrite Inc (OTCPK:ABLT), H.B. Fuller Company (NYSE:FUL), Quaker Chemical Corporation (NYSE:KWR), Material Sciences Corporation and RPM International, Inc (NYSE:RPM). In early January Material Sciences Corporation was acquired by Zinc Acquisition Holdings, so it will now be taken out of the peer group. I have also taken out American Biltrite, because it has been a distressed company over the last couple years and would only skew the data. The industry average is for the specialty chemicals industry taken from Morningstar.

A fundamental look at Chase Corporation's financials

CCF has very high industry average margins. Its gross margin has improved from 29.61% in 2009 to a current TTM of 34.56%, putting it at about the 75th percentile in the industry. Both operating margins and profit margins are in the top 20% of chemical companies. Operating margins are 17.38% in the recent quarter annualized and 10.98% for profit margin also most recent quarter annualized. We will see later that it is also the highest amongst its peer group.

As for the returns, CCF is also in the top 70% across the board. Return on Sales for the most recent quarter is 10.98% vs. the industry average of 5.59%, putting it in the 81st percentile. Return on equity is also within the top 30%, but is below the industry average by about 2%. We will dig a little deeper into the ROE later when we get rid of the financial leverage.

One thing I noticed about Chase Corp a while back was that it was growing fairly fast, with very little debt. Chase has a debt/equity ratio of about .4, while the industry average remains at .6. In the most recent quarter the current and quick ratios were 3.73 and 2.52, respectively. This means Chase has an extensive amount of cash that it can use after paying off current liabilities to further pursue merger activities (which has been a key driver for growth).

Relative valuations of the peer group

After looking at my peer group, I realized this was going to be a fairly fast and dirty analysis. Chase has the second lowest P/E (or lowest if you wanted to exclude RPM due to negative revenue growth). If we decide to look past RPM, we can clearly see that while Chase has the lowest P/E, they also have the most desirable numbers except for D/E and P/S. However, price-to-sales is very close to the peers and debt-to-equity remains second best. Still though, the amount of debt remains low compared to the industry average of .6 mentioned above.

One thing I really like to always do is break down the ROE using the Dupont formula. I do this to get a better look at what is driving the ROE. The reason CCF is doing so well is due to their large profit margin. I was a little disappointed when I learned they have the lowest asset turnover, suggesting the others are better able to manage and make money with their assets. The second highest ROE after leverage was RPM, but we can see here that their capital structure is what gave them that advantage while having the second worst profit margin and asset turnover.

(click to enlarge)

I went ahead and looked how the price of the stock has been doing. Chase has grown almost 150% in the last 3 years and is still considered to be a bargain by its peers. In fact, it is still priced below the S%P 500's current P/E average of about 18.3.

What to expect down the road

While I do see a current good buying opportunity, the stock is actually down 8% YTD and has only grown about 14% in the last year. I believe part of the reason is that there are no current analysts covering the stock, which has kept its trading volume low. From 2012-2013 EPS grew 81% and net revenues were up 45%. This was primarily driven by the company's partnership with NEPTCO. The 10 year CAGR for EPS and net revenues are 49% and 9.1%, respectively. With that said, I do think this is a great short-term buy. For long-term buyers, I would not let this be on a passively managed list of stocks.

Source: Everything About Chase Suggests A Strong Buy