ModernGraham Valuation: Olin Corporation (OLN)

moneyCompany Profile (obtained from Google Finance): Olin Corporation is a manufacturer focused in three business segments: Chlor Alkali Products, Chemical Distribution and Winchester. Chlor Alkali Products manufactures and sells chlorine and caustic soda, hydrochloric acid, hydrogen, bleach products and potassium hydroxide. Chemical Distribution manufactures bleach products and distributes caustic soda, bleach products, potassium hydroxide and hydrochloric acid. Winchester products include sporting ammunition, reloading components, small caliber military ammunition and components, and industrial cartridges. The Company’s subsidiary, Olin Canada ULC, operates one chlor alkali facility in Becancour, Quebec, which sells chlor alkali-related products within Canada and to the United States and also sells and distributes ammunition within Canada. On August 22, 2012, the Company acquired K. A. Steel Chemicals Inc. (KA Steel). KA Steel is a distributor of caustic soda in North America and manufactures and sells bleach in the Midwest.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 7/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $24.90
MG Opinion Overvalued
Value Based on 3% Growth $29.45
Value Based on 0% Growth $17.27
Market Implied Growth Rate 2.79%
NCAV -$10.91
PEmg 14.08
Current Ratio 2.06
PB Ratio 2.08

Balance Sheet – 9/30/2013 

Current Assets $877,100,000
Current Liabilities $426,100,000
Total Debt $690,500,000
Total Assets $2,843,000,000
Intangible Assets $888,800,000
Total Liabilities $1,745,700,000
Outstanding Shares 79,600,000

Earnings Per Share

2013 (estimate) $2.15
2012 $1.85
2011 $2.99
2010 $0.81
2009 $1.73
2008 $2.07
2007 $1.36
2006 $2.06
2005 $1.95
2004 $0.74
2003 $0.02
2002 -$0.63

Earnings Per Share – Modern Graham 

2013 (estimate) $2.03
2012 $1.94
2011 $1.93
2010 $1.46
2009 $1.81
2008 $1.77


Olin Corporation appears to be a great company for both Defensive Investors and Enterprising Investors.  In fact, it passed all of the requirements of the Defensive Investor, which is not an easy feat to accomplish.  For the Enterprising Investor, the only negative is the high level of debt relative to current assets.  Either investor type should feel very comfortable proceeding with further research, beginning with a review of the 5 Undervalued Companies we reviewed last weekend.  However, from a valuation perspective the company would appear to be overvalued at the present time.  The EPSmg (normalized earnings) have only grown from $1.77 in 2008 to an estimated $2.03 for 2013.  This amount of growth does not quite support the market’s implied estimate of 2.79%, though it is very close to our margin of safety and some arguments could certainly be made in the comments below about whether the company is actually fairly valued.

What do you think?  Do you agree that Olin Corporation is overvalued?  What would be your assessment?  Is the company suitable for both Defensive Investors and Enterprising Investors?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Olin Corporation (OLN) at the time of publication and had no intention of entering into a position within the next 72 hours.

Photo Credit:  Andrew Magill

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