Can OM Group Get Off The Roller Coaster?

| About: OM Group, (OMG)
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OM Group, Inc. (NYSE:OMG) produces metal-based specialty chemicals for about 30 industries, including aerospace, automotive, computer, construction, and consumer electronics. OMG produces base metal chemistry products such as organics, inorganics, powders, and metals (nickel, cobalt, and copper). It offers about 800 products to roughly 2,100 customers; about two-thirds of the company's sales are in Finland.

As recently as late 2002, investors dumped this stock down to $4.00 a share. Since then, it hit $59.70, a little light of its all time high of $73.70, reached in early 2002. That was a rough year for investors that held on. But, as they say, that's history. In late 2005, the stock started to move dramatically to the upside, starting from a low of $12.40 and steaming ahead to $59 a share. 400% in one year is most unusual, especially for something as mundane as base metals.

Much of that has to do with prices, higher prices. In the September quarter, sales increased by 23% compared to the same quarter last year, thanks to higher prices for cobalt and nickel. Analysts are looking for similar improvements in this quarter, believing metals prices will hold or go higher for the period.

Another reason for optimism: the Specialty group is seeing higher demand and prices with sales increasing 17% in the third quarter. Better sales in the battery and memory disc industries are driving the new orders. The Nickel subsidiary saw a much better third quarter as well as refining activity, higher prices and hedging gains, which all came together at once.

The company more than doubled in size in 2001 when it acquired the precious metals and metals management unit of Degussa Metals Catalyst Cerdec [dmc2]. The deal didn't work out as well as OMG had hoped, though; OMG later sold the unit to Belgian metals giant Umicore. Similarly, OM is selling its nickel assets, with the deal expected to close in the first quarter of 2007. The proceeds should be about $408 million and can be used to pay down some debt (currently about 36% of the balance sheet) and buy new companies. The buyer, Norilsk Nickel, has agreed to supply OM the nickel required for its specialty chemical business for the next five years.

This is a mid-cap company of $1.5 billion. Return on equity this year will jump to 25.5%, up from 5.1% last year. Don't expect that again next year. Analysts think 14% will be the number then. Earnings can be erratic at OM Group. There was a loss in 2003 of $1.99 a share. The following year, eps went to the plus side by $4.39 a share. Last year, they were 95 cents, and this year the final tally should be $6.45 a share. Analysts are predicting $3.50 next year.

With an earnings roller coaster like that, the stock price can be very volatile, and OMG's has been, as described earlier. What investors need to determine is whether the projections for OMG are realistic (one analyst sees sales rising only 1.5% annually, on average, over the next 5 years while earnings skyrocket by 26% a year, on average, in the same time period). But those averages may come from extreme volatility as the company has already demonstrated in the not too distant past.

OMG 1-yr chart


Disclosure: Author has no position in OMG.