In a nutshell, NewMarket (NYSE:NEU) sells additives that improve the performance of petroleum products. A primary end goal is to enhance the performance of machinery, equipment and just about anything that uses fuel or needs lubricants. The industry has gotten much more attention since Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) announced it was acquiring NewMarket rival Lubrizol, back in March. Interest from “the Oracle of Omaha,” and solid operating results have pushed NewMarket’s stock up lately, though earnings growth continues to be impressive.
Third Quarter Recap
Sales advanced 18.1% to $557.4 million on an 18.7% jump in petroleum additive revenues. Management attributed the increase to higher selling prices, and, to a lesser degree, positive currency fluctuations from overseas sales. The amount of product shipments was flat, but NewMarket did detail it experienced increased shipments of higher priced products during the quarter.
Reported operating profit jumped 50.2% to $124.7 million, but included a $38.7 million gain from a legal settlement NewMarket received, to settle allegations that rival Innospec (Nasdaq:IOSP) resorted to bribery and kickbacks to win contracts in Iraq and Indonesia. Net income ended up rising 56.2% to $71.4 million, or $5.22 per diluted share. Backing out the legal settlement gain, and another smaller one-time item related to a loss on an interest rate swap agreement, net income was $55.4 million, or $4.06 per diluted share, or up about 19.1% from last year’s third quarter. (To know more about interest rate swap, read: How Do Companies Benefit From Interest Rate And Currency Swaps? )
Analysts currently project full-year sales growth of 19.3%, total sales north of $2.1 billion and earnings of $14.74 per share, which would represent year-over-year profit growth of nearly 22%.
The Bottom Line
NewMarket’s management detailed that industry conditions have remained fairly steady so far in 2011, and should remain so for the foreseeable future. This stability, along with Buffett’s interest in the industry, have helped keep NewMarket shares up toward their highs over the past year. At the current level, of slightly below $200 per share, the forward P/E stands at slightly above 13. This is still a reasonable multiple considering NewMarket has been able to grow earnings more than 30% annually over the past five years.
However, the stock has experienced a strong run, and the multiple is now among the highest that NewMarket has traded for historically. The industry is also still cyclical, with demand stemming from industrial activity, and the need to operate vehicles and equipment. Energy giant Chevron (NYSE:CVX) also operates a fuel additive segment and trades at a forward P/E of below 10, though it is obviously more exposed to oil and gas activity throughout the world. (To know more about cyclical stocks, read: Cyclical Versus Non-Cyclical Stocks. )
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At the time of writing Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article
Do not buy additives unless there is uncontrovertable evidence of their effectiveness.