Bear Of The Day: Kraton Performance Polymers

| About: Kraton Corporation (KRA)

Kraton Performance Polymers (KRA) recently reported its third straight earnings miss, prompting analysts to revise their estimates significantly lower for both 2013 and 2014. This sent the stock to a Zacks Rank No. 5 (Strong Sell). Despite the negative earnings momentum, shares of Kraton still trade at a premium to their peers on a forward P/E basis. Investors may want to wait for earnings momentum to turn around before establishing a long position.

Kraton Performance Polymers produces engineered polymers that are used in a variety of products, such as adhesives, coatings, consumer and personal care products, sealants and lubricants, and medical, packaging, automotive, paving, roofing, and footwear products.

Second-Quarter Results

Kraton Performance Polymers reported disappointing second-quarter results on July 31. Adjusted earnings per share fell 67% year over year to 15 cents, missing the Zacks Consensus Estimate by 9 cents. It was the company's third consecutive earnings miss.

Sales were down 11% to $334.5 million, well below the consensus of $363.0 million. The decline was driven mostly by lower butadiene prices as overall volumes were essentially unchanged. The Paving and Roofing end market saw the biggest revenue drop of 19%, thanks in part to wet weather. Meanwhile, the gross profit margin fell 166 basis points to 17.9% of sales.

Estimates Fall

Following the Q2 earnings miss, analysts revised their estimates significantly lower for both 2013 and 2014. This sent the stock to a Zacks Rank No. 5 (Strong Sell). The Zacks Consensus Estimate for 2013 is now $0.98, down from $1.47 just 30 days ago. The 2014 consensus is currently $1.87, down from $2.13 over the same period. You can see this dramatic drop in the company's Price & Consensus chart:


Shares of Kraton currently trade around 12x 12-month forward earnings, which might sound cheap on an absolute basis, but is a premium to both the industry multiple and its historical median. Its price-to-cash-flow ratio of 18 is also above the industry and its historical median.

The Bottom Line

With falling earnings estimates and premium valuation, investors should consider avoiding this Zacks Rank No. 5 (Strong Sell) stock until its earnings momentum turns around.

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