Chase Corporation: Filling in the Cracks

With asphalt additives, sealants and duct-tape supreme, Chase Corporation (AMEX: CCF) is keeping the edgy infrastructure in the United States from cracking up. There’s a lot to do and Chase is doing its share. Through acquisitions and efficient operations, Chase is forging a foundation of profit and revenue growth.

That’s what happens when you’re exploiting niches in an industry in need. Bridgewater, Mass.-based Chase, founded in 1946, has eight core product lines. These include the asphalt additives and joint sealants for paving roads and bridges, tapes for natural gas and oil pipeline repair, and tapes for electrical and telecom wire repair. It also makes coatings for printed circuit boards, durable papers for radio-frequency identification tags, custom printed labels and packaging materials. The company also has a smaller electronic manufacturing services division.

For the first quarter of fiscal 2008 ended Nov. 30, Chase reported this month an 11% gain to revenues to $34.6 million, compared to the same period the previous year. Diluted earnings per share increased 32% to $0.41, up from $0.31. The quarter’s success followed a similar 2007, when revenues increased to $127.5 million, up from $108.4 in 2006. Earnings per share were $1.22 in 2007, up from $0.77.

Chase’s power stroke is coming from highway and bridge construction products, and pipeline expansion and upgrades. Federal money earmarked for highways is driving spending on transportation infrastructure, and last summer’s bridge collapse in Minnesota also is likely to mark additional spending on repair and maintenance of bridges, says Robert Damron, analyst at 21st Century Equity Research, in an October report as he initiated coverage with a “strong buy” rating.

Higher energy costs also are spurring expansion and upgrades of national gas and oil pipelines, says Damron, the sole analyst covering the company. Management is consolidating and integrating many separately-run companies to increase cross-selling opportunities and reduce duplicate costs.

Chase operates in two segments. Its electronic manufacturing services division represents only 15% of revenue. Growth, instead, has come from the specialized manufacturing segment, which makes Chase’s myriad material products. Most of these products go to construction projects for bedraggled roads, bridges and airport runways, among other basket cases.

The ailing infrastructure industry is huge. The construction chemical industry in the United States is projected to reach $7.5 billion in 2008, says Damron, citing industry sources. Protective coatings represent the largest category at 45%, followed by adhesives and sealants at 32%, and concrete admixtures at 18%. Asphalt additives account for about 5%, or $375 million.

The construction chemical industry is expected to increase about 5% in 2008, led by cement and asphalt additives as contractors realize the benefits of new technologies. Other areas that Chase competes in — including labeling and packaging — are big, too.

Big markets, big competition. The Dow Chemical Company (NYSE: DOW), DuPont (NYSE: DD), and WR Grace and Company (NYSE: GRA) dominate chemical construction products; GE Silicon is also a major competitor. And Tyco International Ltd. (NYSE: TYC) and 3M Company (NYSE: MMM) are major forces in tapes for pipe coatings and repair.

Chase has thrived through a series of small but strategic acquisitions, improvements in efficiency and healthy market demand. The company says in its fiscal 2007 annual report that its key brands, including HumiSeal, Paper Tyger, Chase & Sons, Chase BlH2Ock, Tapecoat, Royston and Rosphalt50, continue to provide value in the marketplace. Its French company, HumiSeal Europe SARL, was formed in March to expand Chase’s presence in Europe.

Operating margins improved in 2007 as the recent acquisitions and manufacturing integration of various product lines paid off. Operating margins in 2007 were 18.7%, up from 12.3% the previous year. Chase’s EBITDA margins have increased more than 400 basis points over the last two years to 15.4%, and Damron says there are opportunities for further improvement.

The record performance by Chase in 2007 is expected to be broken in 2008. In a January note after first quarter results, Damron estimated revenue in fiscal 2008 through March at $141 million, up 11% on the year, and earnings per share at $1.45, up 19%.

Still, he lowered his rating to “neutral” from “strong buy” as Chase rallied to hit his original target price of $26 after first-quarter results were released. Damron cited valuation and other factors for his caution, including higher raw material costs, impending incremental expenses related to the expansion of a facility in Pittsburgh and concerns about an economic slowdown. Chase is exposed to overall weakness in industrial markets.

The stock is up nearly 30% since Damron launched coverage at the start of October and is still near its all-time high; most major indexes are down roughly 10% during the same time. Chase has seen its shares more than triple in the past two years, bringing market capitalization to $190 million. Shares closed Friday at $22.92 each, having hit an all-time high Jan. 9 at $26.45 on the first quarter news. The 52-week low is $12.12.

Chase also is moving into a slower time of year for many of its product lines. In first quarter comments, management said it is paying close attention to the overall economy, including the housing market, inflation, and cost of petroleum related goods and services, as well as the impact of the global market.

The company intends to continue its acquisition strategy. Its latest purchase was in September, when it bought British firm Long Products, which makes waterproofing and corrosion protection systems for oil, gas and water pipelines. It has been a major supplier to Europe, the Middle East and Southeast Asia. Chase’s long-term debt to capitalization was 17% in the latest quarter, consistent with that of the past five years.

Chase’s own infrastructure is solid: operational efficiency, growing revenues and earnings, keen acquisitions and a burgeoning market. Once the market — and industrial demand — gets solid footing, Chase (CCF) looks set to cobble together another run at record highs.

Disclosure: none