OM Group (OMG) recently delivered disappointing second quarter results, and management lowered its full year EBITDA forecast. This prompted analysts to revise their earnings estimates significantly lower for the company, sending the stock to a Zacks Rank #5 (Strong Sell).
While shares have sold off year-to-date, they still do not look like a value at 22x forward earnings and 2.5x tangible book value, both of which are above their historical multiples.
OM Group calls itself a “technology-driven diversified industrial company serving attractive global markets.” The company reports its results in four segments:
- Magnetic Technologies (46% of net sales year-to-date)
- Specialty Chemicals (28%)
- Battery Technologies (15%)
- Advanced Materials (11%)
The Magnetic Technologies segment makes industrial-use magnetic materials used in several different end markets. The Specialty Chemicals segment produces chemicals for electronic applications, industrial applications and photomasks. And the Battery Technologies segment provides advanced batteries, battery management systems, and energetic devices for defense, space and
medical markets.
OM Group recently divested of its Advanced Materials business.
Second Quarter Results
OM Group delivered disappointing second quarter results on August 1. The company reported adjusted EPS of 28 cents, well below the Zacks Consensus Estimate of 41 cents.
Net sales for Q2 were $297.5 million. Excluding the divested Advanced Materials business, net sales increased slightly to $253.8 million. Sales growth in the Magnetic and Battery Technologies segments were somewhat offset by a decline in Specialty Chemicals.
CEO Joe Scaminace stated in the press release that “European business conditions are not developing as expected, our growth initiatives are taking longer than expected to contribute to our results, and global electronics markets have been slower to recover than planned.”
Estimates Falling
Following the disappointing Q2 results, management lowered its full year EBITDA forecast from a range of $130-$140 million to $120 million. This prompted analysts to unanimously revise their EPS estimates significantly lower, sending the stock to a Zacks Rank #5 (Strong Sell).
The Zacks Consensus Estimate for 2014 is now $1.01, down from $1.35 before the report. The 2015 has fallen from $1.70 to $1.28 over the same period.
Fundamentals
Although shares of OM Group are down more than -25% year-to-date, the valuation picture still does not look attractive. The stock trades at 22x 12-month forward earnings, well above its 10-year median of 12x. Its price to tangible book ratio of 2.5 is also above its historical median of 2.0.
And while OM Group doesn’t carry any long-term debt, it does have a $228 million pension liability. That’s more than 3.5x the company’s total operating cash flow in 2013.
The Bottom Line
With weak end market demand, falling earnings estimates, and lofty valuations, the near-term outlook for OM Group does not look very compelling.
Todd Bunton, CFA is the Growth & Income Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor service.
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