INNOSPEC INC IOSP
March 05, 2015 - 4:58pm EST by
angus309
2015 2016
Price: 44.00 EPS 3.30 3.75
Shares Out. (in M): 24 P/E 13.3 11.7
Market Cap (in $M): 1 P/FCF 10 8.8
Net Debt (in $M): 100 EBIT 106 119
TEV ($): 1 TEV/EBIT 11 9.3

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  • Chemicals
  • Basic Materials
  • Specialty Chemicals
  • Spin-Off
  • Compounder

Description

 

Innospec (IOSP) is a Colorado based specialty chemicals business formerly known as Octel, which was spun off from Great Lakes Chemicals (now Chemtura) in 1998. At the time of the spin the primary product was lead additive for gasoline (called TEL). As you might be aware, this was once a fantastic business that was in a state of secular decline at the time of the spin. It was imperative for managment to diversify against this still cash flow positive but declining business, and diversify they did.  

Innospec is now comprised of the following divisions : 

Octane Additives : This is the legacy business, and today, thankfully only represents 10% of gross profits. A fund fact here is that Innospec is the only supplier of TEL to North Korea so that Dear Leader can enjoy crisp healthy air in Pyongyang. Though this business is dying, it will be some time before the final chapter is written. In addition to North Korea, TEL is still an ingredient in aviation fuel for conventional piston driven planes. So while in decline, O.A. provided a stable if declining cash flow from which to diversify. 

Performance Chemicals : This segment represents approximately 20% of gross profits, and includes the following : Personal care additives (silicones and emollients and conditioning agents), aroma chemicals, waxes for the plastics and polymers markets, and household and industrial applications (think detergents). 

Fuel Specialties : This is the largest segment at approximately 70% of gross profits, and includes the Oilfield Specialties unit. Products manufactured in this segment are non-leaded fuel additives, fuel detergents, octane enhancers, corrosion inhibitors and specialty chemicals addressing the refining market, heating, marine fuel, and energy drilling and production. 

Innospec has done a nice job in their acquisitions, showing lots of discipline. One thing that I love about this security is that Innospec has nearly doubled their sales in the last 5 years to $1B, while the shares outstanding has remained static. They have not gone crazy on the balance sheet, as debt remains very low for this industry at just around 10% of the market cap. 

Innospec's diversification staregy into specialty chemicals appears to be bearing fruit. The one acquisition that gave me a bit of pause was a $200mm purchase, Independence, in the oilfield chemicals space in late fall of 2014. On the most recent 4th quarter and full year earnings report though, CEO Patrick Williams noted that expectations were exceeded, and they continued to see growth and market penetration in this segment.

While Innospec is certainly not a growth story, I did like seeing that revenues of $291mm beat by nearly 6% of expectations, and earnings net of special items beat at $1.16 per share by over 30% of expectations.

Innospec rode through with profits through the financial crisis, and though profits are flattish, the profit mix is comprised more of specialty chemicals, and less from the original cash cow of lead additives.

EPS

2011 : 3.49

2012 : 3.33

2013 : 3.18

2014 : 3.24 

My future estimates :

2015 : 3.30

2016 : 3.75

Similar companies do enjoy higher multiples, and this comapny is practically begging for some financial engineering by someone outside (if not management), given the miniscule debt level. Not a sexy company, but one which should see rising earnings, and I hope, multiple expansion in the years ahead. A reasonably good business with a very solid 15% overall ROE, strong cash flow, and disciplined managment; Innospec should compound at high single digits, minimum IMO. 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

Disciplined management continues to execute, recognition of the changed nature of the business, financial engineering.

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