Valuation: Olin Corporation (OLN)

Company Profile: Olin Corporation (OLN) (obtained via Yahoo Finance)

Olin Corporation engages in the manufacture and sale of chlor alkali products to commercial and industrial markets in the United States and internationally. It operates in two segments, Chlor Alkali Products and Winchester. The Chlor Alkali Products segment offers chlorine and caustic soda, sodium hydrosulfite, hydrochloric acid, hydrogen, bleach products, and potassium hydroxide. The Winchester segment produces and distributes sporting ammunitions, reloading components, small caliber military ammunition and components, and industrial cartridges. The company markets its products and services to various industrial customers, wholesalers, and other distributors, as well as to the U.S. government and its contractors. Olin Corporation was founded in 1892 and is based in Clayton, Missouri.

1) Is the business simple and understandable?

This is a simple and understandable business as Olin Corporation is the third-largest chlor-alkali producer in North America and the largest manufacturer of industrial bleach. The firm’s Winchester division is a long-standing leader in the market for small-caliber ammunition for military, law enforcement, recreational, and industrial use.

2) Does the business have a consistent operating history?

This stock is in the chemicals industry, which has generated market-like returns over the past 5- and 10-year periods. Note that compared to other stocks in its industry, its five-year returns have been about average. This stock has also seen steady revenue growth over the past three years. Compared to the industry main competitors this stock’s earnings per share have fallen over the past three years, though Olin did much better last year. Also, this company has maintained a steady increase on its operating margin since 2001, which may had been caused to high demand of organic goods, the oil and gas industry, pharmaceuticals, detergents, food processing, and others on which Chlor Alkali works as a complementary good.

3) Does the business have favorable long term prospects?

The stock’s forward earnings for Olin Corporation yields 9.26%, which is normal compared with the earnings yields of other stocks in its industry, and gives a healthy signal to investors.

On a case to case basis a company in distress has a high yield because its stock has dropped sharply, which is why it is important to be reasonably confident about the quality of this stock’s earnings. Therefore, one way to verify earnings quality is to look at other valuation measures such as the price/cash flow ratio, which should not be dramatically higher than the stock’s forward price/earnings ratio. In this case, the P/CF (11.7) is roughly higher than the company’s P/E (10.8)

On the other hand, Olin Corporation has posted results that are about average for its industry over the long-run. Though its ROA over the most recent trailing 12 months was very low (.25%), we notice that the company’s net profit margins (6.3) have been slightly higher than other companies (5.67) in its industry.

This stock has a low dividend yield (3.1), which is typical of stocks in its industry. We also noticed that this stock’s dividend has been very stable the past five years.

4) Is management rational?

This company’s operating income and EPS has reported negative growth of 6.8% and 7.6% respectively over the past 10 years, which makes us assume that Olin management has not been rational on their operating decisions.

5) Is management candid with its shareholders?

OLN has kept their investors aware of their stock performance by adding features such as e-mail alerts, calendar of events, stock quote, analyst coverage, recent news, press releases, and other tools that are useful for the company’s shareholders.

Financial and Value Review

Defensive:

1) Size of firm

Since this is a small-cap firm, this test will fails. “Fail”

2) Strong financial condition

This company’s current ratio is higher than 2. “Pass”

3) Earnings stability

Olin Corporation has not maintained positive Net income for the past 10 years. “Fail”

4) Dividend record

They have constantly paid dividends for the prior 10 years. “Pass”

5) Earnings growth

Its EPS has increased one third for the past 10 years. “Pass”

6) Price to earnings analysis

The PE ratio is lower than 20. “Pass”

7) Price to assets analysis

The company’s PB and PB*PE ratio are higher than 2.5 and 50 respectively. “Fail”/”Fail”

Overall

Having passed half of the 8 required defensive investor’s tests; we do not find Olin Corporation to be a suitable investment for the defensive investor.

Enterprising:

1) Strong financial condition

The company’s current ratio is higher than 1.5 and its debt to NCA is lower than 1.1, therefore passing both of these tests. “Pass”/”Pass”

2) Earnings stability

OLN has had positive net income for the past 5 years. “Pass”

3) Dividend record

They currently pay dividends. “Pass”

4) Earnings growth

The earning growth has been greater than 5 years ago. “Pass”

5) Price

Olin Corporation’s price is higher than 150% net tangible assets. “Fail”

Overall

Having passed all but one of the Enterprising tests, we feel that Olin Corporation falls within the acceptable level for Enterprising Investors.

Valuation:

Our valuation model finds a fair value to be around $26.91

Opinion:

Since the company is currently trading at about $23.14, we feel it is currently undervalued and that it may only be suitable stock for enterprising investors.

The author did not hold a position in OLN at the time of publication. Also, please read our disclaimer and Our Methods.