A Value Investing Analysis of Omnova Solutions - Seeking Alpha

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  • 7/29/2019 A Value Investing Analysis of Omnova Solutions - Seeking Alpha


    2/10/13 A Value Investing Analysis Of Omnova Solutions - Seeking Alpha


    A Value Investing Analysis Of Omnova Solutions

    February 7, 2013by: Garrett Blackwood

    | about: OMN, includes:ALB, DOW,FUL, SCL

    Disclosure: I am long OMN. (More...)

    Specialty chemicals manufacturer OMNOVA (OMN) has had its share of ups and downs since hitting a 52-week highin October. Disappointing 3Q 2012 sales and 4Q 2012 earnings estimates that missed big time - analysts expected$0.13 per share and results were $0.07 per share - have sent the share price on a roller coaster. OMNOVA issensitive to global demand and the domestic U.S. economy global sales are what tanked sales in 2012. However,CEO Kevin McMullen said that a "recovering U.S. housing market, growth in oil and gas exploration and a betteroutlook for the automotive and transportation segments in North America and Asia should help improve earnings infiscal year 2013."

    Since reporting 4Q 2012 earnings on January 22, share price has been trending as some investors seem to agreewith CEO McMullen. What do the metrics say? An analysis of fundamentals agree with McMullen: OMNOVA isselling at a discount and presents a buy opportunity. Let's break down the numbers:

    Tobin's Q: Assets

    Tobin's Q is a simple and easy quick-check of a company's value based on assets. Tobin's Q compares (divides) themarket value of the company to the total assets of the company. A result less than 1 indicates that a company isundervalued based on assets. How does OMNOVA score? With a market value of $372 million and total assets of$874 million, we get a Tobin's Q of 0.43. Not enough information to make a purchase decision, but this is a promisingstep in the right direction.

    "Buffett-Style" Formula: Discounted Net Income

    While Warren Buffett has never laid out a nice pretty formula to guarantee investing success, he has dropped hintsover the years. These hints have been used to create what is known on the street as the "Buffett Formula." Start withNet Income, add back Depreciation and subtract Capital Expenditures. Divide this result by the average investmentgrade bond yield, and then divide by the number of shares to get an intrinsic value. This formula ignores industry andmarket factors and calculates a value solely on the company's results. OMNOVA's Buffett Formula intrinsic value is$27.42 for a 71% margin of safety. Too high, in my opinion, but it agrees with Tobin's Q that the company may beundervalued.

    Valuation by Multiples: Industry Comparison

    Valuation by multiples has historically been one of value investing's best tests for value. It is a layered formula that

    compares the target company to a basket of its closest competitors, which we will call "comparables." For OMNOVAI selected The Dow Chemical Company (DOW), HB Fuller Co. (FUL), Albemarle Corporation (ALB) and StepanCompany (SCL) as comparables.

    Investors can use any price-to-performance ratios they choose, such as P/E, P/S, P/CF and P/BV. For example, wewill compare OMNOVA's trailing twelve months P/E, P/S and P/BV ratios to the ratio's of its comparables:

    Competitor P/E P/S P/BV

  • 7/29/2019 A Value Investing Analysis of Omnova Solutions - Seeking Alpha


    2/10/13 A Value Investing Analysis Of Omnova Solutions - Seeking Alpha


    Dow Chemical 45.690.672.27

    HB Fuller Co. 15.881.042.51

    Albemarle Corporation17.712.013.01

    Stepan Company 17.620.682.73

    Basket Average

    OMNOVA 13.070.332.86

    We see that OMNOVA has lower P/E and P/S multiples but a slightly higher P/BV ratio. Next we multiply the basketaverage against OMNOVA's per-share metric to reach an intrinsic value, using the following metrics:

    P/E times EPS

    P/S times Revenue per Share

    P/BV times Book Value per Share

    Multiples AverageOMN Per-ShareTarget Price

    P/E 24.23 0.60 $14.54

    P/S 1.10 24.11 $26.53

    P/BV 2.63 2.78 $7.31

    Average Target Price $16.12

    We get a $16.12 intrinsic value based on these three metrics. A concern I have about this price is how dependent itis upon DOW's high P/E. Personally, I prefer to include as many ratios as possible in order to smooth out basketoutlier's such as DOW's P/E. Bringing in other ratios, including P/CF and P/EBITDA, I get a more conservative targetprice of $14.02 for a 44% margin of safety.

    Tobin's Q, the Buffett Formula and Valuation by Multiples all agree that OMNOVA is undervalued. The $14 targetprice is a couple dollars more than the highest analyst target, but I expect my target price to fluctuate a tiny bit eachquarter as new results come in. The 44% margin of safety tells me I have a 44% "buffer" in the movement of thetarget price before I risk losing my investment. My confidence in the formulas combined with this acceptable marginallow me to trust my $14 target price.


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