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Summary

  • The company beat earnings, but shares are relatively flat since doing so.
  • The earnings beat is in line with what we expected, where the company is seeing growth in its key segment (aerospace) which relies on Boeing and Airbus.
  • Going forward, the company should start seeing meaningful margin expansion which should boost margins. The recent earnings just reaffirms our buy rating.

Cytec Industries (NYSE:CYT) posted Q2 EPS that beat earnings consensus by nearly 12% earlier this month, marking the fourth straight quarter of a consensus beat. Shares jumped 3.5% on the news, but over the last week have given back most of these gains. EPS came in at $1.71 (beating consensus of $1.53) and revenues came in at $527 million (beating consensus of just over $525 million). Driving the solid quarter was aerospace. The company noted that aerospace" delivered steady sales growth related to build rate increases in the large commercial transport sector."

Cytec will also be doing a 2 for 1 split in September and upped its quarterly dividend by 100% to $0.25/share. It now yields just under 1%. Since we first covered Cytec back in September, shares are up 38%. We noted in September that aerospace would be the key driver for the company. It gets around 50% of its operating profit from the segment and it should be able to ride the coattails of Boeing and Airbus higher (its two largest customers).

We still have a $126 price target on Cytec (which is 20% higher than current levels). The market might still be missing the company's margin potential, where we note that (from September),

"...the market is not fully appreciating the company's divestiture of its resin business, which pressured margins for a number of years. With the company replacing resins (formerly 45% of revenues and an operating margin of less than 4%), with aerospace (50% of revenue and an 18% operating margin) as its top segment, we believe EPS will grow nicely over the interim." Operating margin has already gone from 15.99% in 2013 to 16.6% over the trailing twelve months.

Source: Update: Cytec Industries Earnings - Giving Back