An Opportunity In Olin Corporation

Summary

• Specialty chemical manufacturer Olin Corporation is in our spotlight today.
• The company delivered solid second quarter results from across all three of its business divisions and the demand for ammo continues to soar.
• Is it time to add this name to your portfolio? A full investment analysis is provided in the paragraphs below.
• Looking for a helping hand in the market? Members of The Insiders Forum get exclusive ideas and guidance to navigate any climate. Learn More »

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You're a part of the order if you're not against it.” - Saleem Sharma

Today, we take a deeper look at a mid-cap specialty chemical concern that seems cheap at first glance. Does this name deserves a "thumbs up?" We dive into that question below.

Company Overview:

Olin Corporation (NYSE:OLN) is based outside of St. Louis and manufactures and markets dozens of specialty chemicals and is organized into three business lines: Chlor Alkali Products and Vinyls, Epoxy, and Winchester (ammo). The stock currently trades just under $50 a share and sports a market capitalization just south of $8 billion.

Second Quarter Highlights:

On July 27, the company delivered what turned out to be spectacular second quarter results. Olin produced GAAP EPS of $2.17, more than 60 cents a share better than the consensus. Revenues rose nearly 80% from the same period a year ago to $2.22 billion, some $100 million above expectations. Adjusted EBITDA came in just under $560 million, an all-time record for the company.

Source: July Company Presentation

Olin was firing on all cylinders during the quarter as both its Epoxy and Winchester divisions posted record earnings. As can be seen above, sales from its Winchester business more than doubled from a year ago and were up sequentially from this year's first quarter. The gains in adjusted EBITDA were even more impressive. The business is seeing some cost input price pressure but has offset that by improved commercial pricing.

Source: July Company Presentation

Its Epoxy division was the biggest contributor to profits as higher pricing overcame input cost inflation. This part of the organization delivered huge increases in revenues and adjusted EBITDA both on a year over year basis as well as sequentially.

Source: July Company Presentation

Olin's Chlor Alkali Products & Vinyls division also showed more than solid increases from 2Q2020 and sales improved nicely sequentially even as adjusted EBITDA dropped. In mid-May, the company announced that it planned to permanently shut down 20% of its diaphragm-grade chlor alkali capacity, or ~225K ECU tons, at its Plaquemine, LA, facility. This is the third facility capacity reduction announced over the past year as the company exits high-capital, low-return processes like these and redirects its cash generation model toward higher-margin processes of the chain.

Second quarter 2021 segment earnings were just under $170 million compared to a segment loss of $57 million in the second quarter 2020 for this business line.

Analyst Commentary and Balance Sheet:

Since mid-July five analyst firms including Wells Fargo and Stifel Nicolaus have reissued Buy ratings on Olin, Piper Sandler has initiated the stock as a new buy and Bank of America upgraded the shares from a Neutral to a Buy. Price targets proffered within these ratings range from $57 to $70 a share. Both Barclays ($51 price target) and Morgan Stanley ($56 price target) have reiterated Hold or Neutral ratings.

Here is what Piper's analyst had to say when he assigned a new Overweight rating and $70 price target on OLN on Sept. 13:

The analyst sees the company "altering the future price landscape for both chlorine and epoxy resins by leveraging their position as the producer of the marginal ton of both chlorine and the key epoxy resin raw material, epichlorohydrin," adding that Olin is a rare case in the industry where "pricing power can be wielded with substantive effect."

Source: July Company Presentation

The company ended the first half of 2021 with just under $275 million of cash on the balance sheet against approximately $3.1 billion in debt. The company reduced its debt by some $490 million during the quarter and plans to do so in coming quarters using its leveraged free cash flow (LFCF) in the quarters ahead (above). It should be noted that several insiders sold over $10 million in stock in aggregate in May and a beneficial owner dropped three million shares on September 1st which appears to be approximately 20% of their overall stake in Olin.

Verdict:

The company is executing very well right now and navigated the pandemic admirably. Olin now expects to deliver adjusted EBITDA of at least $2.1 billion for 2021 and is using that cash flow to significantly reduce debt. Leadership expects improved results from all three segments for the third quarter when results are reported at the end of this month.

Source: July Company Presentation

Olin expects increasing adjusted EBITDA to be a key theme for the company to deliver against in the coming years. In addition to paying down debt, one would think this additional cash flow at some point also would be used to raise the dividend which currently sits at just 20 cents a share per quarter.

The stock is not expensive at seven times consensus profits for FY2021 and pays just over a 1.6% dividend payout. Some discount in the P/E is warranted as chemicals are a cyclical industry but the company seems to be well-positioned on several fronts and should continue to deliver increased cash flow in the years ahead. Therefore, I have taken an initial position in OLN using covered call orders. Options against the equity are quite liquid and I'm still not sanguine about the overall market so I am positioning my portfolio accordingly.

Note: At the time of article submission, the May $50 call strikes on OLN were trading at $6.50 a share.

The true order is what the wind creates by scattering the leaves.” - Marty Rubin

Bret Jensen is the Founder of and authors articles for the Biotech Forum, Busted IPO Forum, and Insiders Forum

Analyst’s Disclosure: I/we have a beneficial long position in the shares of OLN either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.