Quaker Chemical Corporation: Small, But Growing

Jun.21.07 | About: Quaker Chemical (KWR)

Quaker Chemical (NYSE:KWR) rolls out specialty chemicals for industrial and manufacturing processes. It produces rolling lubricants used in making rolled aluminum products and hot- and cold-rolled steel products. Quaker Chemical also makes corrosion preventives, metal finishing compounds, hydraulic fluids, and machining, grinding, and forming compounds. Other products and services include aerospace milling compounds, metal and concrete coatings, and chemical management services. Quaker Chemical's subsidiaries and joint ventures operate worldwide, although it sells primarily to the steel, auto, and appliance industries in the U.S. and Europe.

This is a small company (market cap: $250 million) with revenues of $460.5 million last year, expected to go to $500 million this year. But there's nothing small about its earnings power. In 2004, earnings were 94 cents a share, then dropped to 70 cents a share. In 2006, earnings per share went to $1.08. Analysts are looking for $1.35 this year and $1.55 next year.

One of the reasons for improvement in profits is the operations in China where demand is picking up, and KWR is gaining market share. In 2006, it bought out a partner's interest in a joint venture in China which is aiding in profitability. The company has also been able to increase prices while it goes through some restructuring to increase efficiency.

That's all the good news. Some of the bad: the U.S. automotive industry is in a slump and forecasted to stay that way for a while. Furthermore, raw materials prices, particularly crude oil, a main ingredient for most lubricants, continue to rise, putting pressure on margins. Yet, the company will most likely report a 25% increase in profits this year.

Looking further out, toward 2012, analysts see earnings growth to $2.20 as demand for specialty chemicals for the construction and steel industries increases. This will most likely be visible in developing economies where KWR already has a presence such as China and Brazil.

One of the attractive features to this stock is the dividend. It's 86 cents a share which puts the yield at 3.6%. The dividend used up almost 80% of the earnings last year. This year, it should only be 64% and next year 57%, if it remains constant.

A few other numbers: Return on Equity is improving, should be 11.5% this year and 13% next year. Current assets are twice current liabilities. Net profit margin is moving up, from 1.6% in 2005, to 2.3% in 2006. Look for 2.7% this year and 2.9% next year. Officers and directors own about 12% of the stock. Institutions have been net buyers over the last 3 quarters with a total of 105 buying, and 60 selling.

Quaker Chemical is small but growing. It has a presence in China and other developing countries. Earnings are improving, but oil continues to cost more which means higher raw materials cost for KWR. As long as price hikes hold and better efficiencies continue, KWR should do well. Take a closer look if this is an industry of interest. Just be aware that the stock only trades about 35,000 shares a day so liquidity could be a concern.

KWR 1-yr chart


Disclosure: The author has no position.