OM Group: A Good Company Trading At An Undervalued Price

Aug.28.14 | About: OM Group, (OMG)

Summary

OM Group Inc. has accomplished several goals in recent years.

Future goals of the company will benefit shareholders.

The company is strong fundamentally and technically and the current share price presents a favorable entry point.

I search for value. To do this, I start by using flexible screens with popular criteria often seen in value stocks. I do not have a set-in-stone screen that I use, but I typically screen for stocks with a low P/B ratio, a low P/S ratio and a low debt/total cap ratio. While I do consider P/E ratios, I believe EV/EBITDA is a better measure. Also, I often include a screen for stocks trading within about 15-20% of their 52-week lows. I believe buying near a 52-week low and/or a support level can be a way to mitigate downside risk if done correctly. Also, I'm a contrarian so it is in my nature to look for value in out-of-favor stocks.

Using a screen is a good starting point, but it is only the initial step in a bigger process. I do more research on the stocks that make it through the screen before making any purchasing decisions. A recent screen yielded a company that I thought warranted a closer look: OM Group (NYSE:OMG). This company is fundamentally strong and seems to be undervalued.

Background

OM Group is a chemical manufacturing company based in Cleveland, OH. It consists of 3 main divisions: magnetic technologies, specialty chemicals and battery technologies. From 2005-2013, the company focused on and accomplished many goals that were beneficial to shareholders. Several of these goals will be further discussed below. Going forward, the company plans to continue to return capital to shareholders via stock buybacks and dividends. Also, the first phase of its planned improvements is expected to result in $3-4 million in annualized savings after $5-6 million in costs.

Accomplished Goals

In my opinion, one of the most important goals that the company accomplished was its repayment of debt. Currently, the company has no debt outstanding. This, of course, significantly reduces the interest expense. Fig. 1 shows this year-over-year reduction in its most recent earnings.

Figure 1

Figure 1Click to enlarge

Moreover, OMG has increased its net cash in recent years as shown in Fig. 2.

Figure 2

Figure 2Click to enlarge

This, along with its undrawn $350 million credit facility, puts the company in a strong financial position to accomplish its future goal of pursuing complementary acquisitions.

Also, the company has divested commodity businesses and is now focused on the three main divisions of its business mentioned above. The divestiture of its Advanced Materials (cobalt-based) business was completed on March 29, 2013 in which the company received cash proceeds of $329 million. Also, on May 31, 2013, the company completed the sale of its Ultra Pure Chemicals business in which it received cash proceeds of $63 million. EBITDA resulting from the divestiture of these businesses, along with the added EBITDA of its existing business, can be seen in Fig. 3.

Figure 3

Figure 3Click to enlarge

Future Goals

Moving forward, OM Group has several goals it hopes to accomplish. One of these, which has been initiated already, is returning capital to shareholders. The company plans to do this in the form of dividends and stock repurchases. The initial steps it has taken in completing this goal are encouraging; since 2013, the company has returned $29 million to shareholders. The company approved a quarterly cash dividend of $0.075 per share (equating to 1.13% using the closing share price of $26.60 on 8/26/14) and initiated it in the first quarter of 2014. Through the first half of 2014, the company has returned $5 million in dividends to shareholders. The remaining $24 million of returned capital comes from a repurchase of $14 million of common stock in 2013 and a repurchase of $10 million of common stock in the second quarter of 2014. The company plans to continue buying back stock as it has $76 million of authorized repurchases remaining with no expiration ($50 million authorized in January 2013, $50 million authorized in August 2014).

Also, the company plans to improve its business performance and operating capabilities. It plans to spend $5-6 million in headcount reductions and facility consolidations, resulting in $3-4 million in annualized savings. Along this note, the company plans to seek acquisitions that fit its criteria. Some of these criteria include business that complement its existing growth platforms and businesses that are focused on innovation and niche applications. As shown above, the company is in a good financial position to seek and complete these acquisitions.

Fundamentals

I believe OM Group is fundamentally strong and undervalued. This strength is evident in many of the company's price ratios. As of 8/26/14, OMG is trading at a P/B ratio of 0.72, a P/S ratio of 0.76 and an EV/EBITDA ratio of 6.60. And one cannot forget that OMG currently has no debt outstanding, as mentioned above. To support my claim that OMG is undervalued, I present a loose comparison of OMG to chemical manufacturing companies of similar market cap. While this comparison is not meant to be taken as an apples-to-apples comparison, I do believe it gives a sense of what the market values companies similar to OMG. This comparison, which shows that OMG is trading at lower ratios than most of the other companies listed, can be seen in Table 1.

Table 1

Price/Book

Price/Sales

Enterprise Value/EBITDA

OMG

0.72

0.76

6.60

ACET

2.45

1.12

10.20

AVD

1.47

1.18

10.89

CCC

2.53

2.05

11.42

FF

1.83

1.53

5.03

FOE

4.02

0.74

6.54

GPRE

2.37

0.55

7.20

HWKN

2.03

1.09

8.56

IOSP

2.36

1.19

9.31

IPHS

2.68

1.50

10.48

KOP

4.38

0.53

7.76

KRO

1.97

1.11

15.40

KWR

2.85

1.37

10.73

LXU

2.02

1.24

14.03

OCIP

11.36

3.74

9.77

OMN

2.15

0.40

8.00

PEIX

2.83

0.49

5.54

PPO

3.14

3.00

17.55

REGI

0.75

0.36

7.42

REX

2.45

1.15

7.72

RNF

45.39

1.87

18.92

RTK

3.76

1.21

41.60

TREC

2.85

1.21

11.59

UAN

2.74

3.70

10.00

WDFC

5.90

2.73

15.67

WLKP

10.28

0.35

0.88

Click to enlarge

Simple Technical Analysis

I believe that using simple technical analysis can sometimes provide more upside potential while lowering the downside risk - thus, using it to your advantage should at least be considered. OM Group's 52-week price range per share is $24.08-$37.58. The low was set on 8/1/14 and the high was set on 1/21/14. At the closing price of $26.60 on 8/26/14, it is trading around 10% off its 52-week low. The 1-year chart can be seen in Fig. 4.

Figure 4

Figure 4Click to enlarge

Although I am interested in this low, the rough long-term support level of around $13-15 per share, seen in the 14-year chart in Fig. 5, should also be of interest.

Figure 5

Figure 5Click to enlarge

Taking into consideration the fundamental analysis, I believe the current share price is a favorable entry point. However, I would be more confident in buying if the share price fell closer to the rough long-term support level. Although I do not think this will happen, it will be on my radar.

Insiders

One more encouraging aspect of OM Group is the amount of inside ownership of several officers and directors. To give a few notable examples, Joseph Scaminace owns a total 287,346 shares, David B. Knowles owns a total of 92,800 shares and Christopher M. Hix owns a total of 81,300. Also, recent insider purchases have occurred, with the most recent purchase occurring in August 2014. Insider ownership, or lack thereof, should not be viewed as a guarantee that the share price will increase or that the company will improve in the future; rather, it should be viewed as a positive sign that adds another piece to the puzzle.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.