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NewMarket's 10-Q: What You Need to Know

What could be more exciting than reading through a 100-page 10-Q? Making money by using the information gleamed in those reports. Far too often investments are made off the headlines and with a short-term approach. I think that reading the Quarterly and Annual reports of a company are a necessary requirement of owning shares in that company. These reports are there for you to gain a better understanding of the company. Lack of understanding or knowledge in a company leads to outcomes being weighed by "luck".

But who wants to thumb through these reports? Not too many, that's who. Although I still think you should if you are an owner or considering buying shares in a company, I'm going to give you a break. I read the report, did some homework, and am going to let you in on my summary of the 10-Q for the period ending March 31, 2012 for NewMarket Corporation (NYSE:NEU).

NEU is in the petroleum additives market. This may not be the most exciting stock to watch or industry to follow but these types of companies often turn out to be great long-term investments. Back in September 2011 Warren Buffett's Berkshire Hathaway (NYSE:BRK.B) bought Lubrizol, which is a company similar to NEU.

The Headline Numbers

NEU earned $4.96 per share in the quarter ending March 31, 2012. This was an increase of 39% from the prior quarter. The company grew gross revenue by 10.8% and increased the operating margin from 16% to 19.2%. The company ended the period with $72.7 million in cash which was an increase of $22.4 million since December 31, 2011.

Beyond the Numbers

Simply looking at EPS growth is impressive but there are a few gems hidden throughout the 10-Q that deserve some attention too.

  • Dividends: The company announced that the quarterly dividend is increased to $0.75 per share. This is a dividend increase of 70% from the prior quarter.
  • Conservative Cash Management: The company stressed this point, "we will build cash on our balance sheet and will continue to evaluate all alternative uses of that cash to enhance shareholder value, including stock repurchases and dividends". The company has made wise decisions in the past and it gives me comfort that I, as a shareholder, can expect moves to be made that our in the best interests of shareholders.
  • Stock Buyback: The company admits that buybacks are a possibility. During the quarter, the company repurchased 659,373 shares of common stock.
  • Debt Restructuring: NEU is in a strong enough financial position to improve its cost of borrowing by restructuring its credit facility and redeeming senior notes with high interest rates. In April 2012, the company was able to redeem all of its 7.125% senior notes. The ability of the company to acquire lower borrowing costs is going to be another benefit down the road.
  • Price Increases: The company's products are in such a demand that it is able to raise selling prices which led to the increased operating profit for the period ending March 31, 2012.

Unfavorable Information

  • Material Costs: NEU admitted that raw material costs are increasing. Although confident they can recover the raw material cost changes when selling the finished product this is something to monitor.
  • Litigation: If you follow the company than this is nothing new but the EPA has named the company as a potentially responsible party for contamination at five disposal sites in Sauget, Illinois. According to the company, a Feasibility Study should be completed later this year. The company has made accruals for this event and I don't see this as posing a major problem.

Your Next Move

The quarterly release was a fantastic one for the company. I don't see many unfavorable aspects in the 10-Q. Upon release of the numbers on 4/25/12 NEU was up 16.3% and closed at $228.58. The stock price is currently around $211.97.

There are a number of ways to place this name but my favorite with NEU is to own the stock for the long-term. I would like to see the stock come back down to $200 or below. If you can snag this thing at about the $180 level then I think you would have a great deal. With the recent market sell-off it is entirely possible for stocks to continue to sag, especially since oil has been selling off as of late, the oil additives market is sure to do the same. Below I've highlighted the current trendline and support level in a 12 month EPS chart.

(click to enlarge)Newmarket 12 Month EPS ChartMy other favorite strategy with NEU is to use options to do an old and reliable strategy, The Covered Call. This strategy requires owning the stock and selling calls. I favor selling in-the-money or near in-the-money calls as my thought is the market may continue to slide. I would be looking at owning the stock and selling the June 12 $220 Calls for $4.40 and the June 12 $210 Calls for $9.00. The price of the calls is as of 5/8/12.

Sources:

Chart - Zacks

NewMarket 10-Q

Source: Newmarket's 10-Q: What You Need To Know