PSB Monthly Issue August 2015

| August 5, 2015

Time For A Second Bite At The Apple… This Materials Company is Poised to Jump! 

We’re digging into the archives on this trade.

Back in December of 2009, we wrote up a specialty chemical company in a turnaround situation.

The management team turned in a decent performance and the stock price moved higher.  We were able to walk away with a nice profit.

Now five years later, the stock is looking appealing once again.

The stock has now fallen to new lows for the year… and this gives us a great opportunity to swoop in and re-establish a position.

What’s so special about this company?

They now have $1 billion in sales and are very closely tied to a number of industries that are growing rapidly.

I’d expect them to profit from continued growth in a handful of critical industries… and we should see the stock price rebound as the company profits.

Let’s dig into this company and its future…

Introducing OMNOVA Solutions (OMN).

What does OMNOVA do?

Great Question… they produce specialty chemicals.

Their Performance Chemicals business segment produces:

“a range of emulsion polymers and specialty chemicals… Its custom-formulated products include tailored resins, binders, adhesives, specialty rubbers, antioxidants, hollow plastic pigments, and elastomeric modifiers.”

Now, these products are used in a dozen of different products from paper to carpets, textiles and industrial rubbers.

The company also has an Engineered Surfaces segment producing engineered surfacing products including coated fabrics, vinyl, paper and specialty laminates, and industrial films.

The engineered surface products are used in commercial buildings, for remodeling, new construction, flooring, celling tiles, and even office furniture – just to name a few.

What’s the take away?

The company’s products are used in industries that are growing right now.

Think about it…

OMNOVA’s products are used in housing… and if you read last month’s write-up, you know how fast that industry is growing.  Residential construction numbers are jumping!

With the growing economy, we’re seeing more and more product being shipped… and that’s great for not only the paper and packaging industry, but also for the transportation industry.

Would you be surprised to learn that construction and refurbishment is 38% of the company’s sales, followed by 21% in transportation and 17% in paper and packaging.

Three growth industries… and three areas of significant sales.

You don’t need to be an intellectual superstar to see that OMNOVA is positioned perfectly for growth in the coming months and years.

But you can’t just rely on growing industries… the company also needs to have strong financial numbers…

The Numbers

First, let’s start with recent news.

Just last month, OMNOVA announced they would be raising prices on a key product.  This shows me that demand for products is growing and the company’s customers are doing well – otherwise the price hike would fail miserably.

I want to follow this news with the numbers from their most recent quarter.

In June, they announced Q2 results and they were great.

On $220 million in revenue, the company generated $3.9 million in earnings, giving it an EPS of $0.09, or $0.11 after you pull out the accounting garbage…

So earnings matched what analysts were looking for.

Now a few observations… Revenue was light for the company in the second quarter, down from the $266 million they reported last year… but I’m not too concerned.  Here’s why, the gross profit numbers actually went up!

That’s right… with $46 million less in sales, the company reported $52.9 million in gross profit up from $52.6 million.  It means pricing and product mix is improving!

With other expenses up a tad… I see a lot of leverage in the earnings numbers… IF the sales numbers ramp back up again!

Looking at the cash flow statement, in the first six months of 2015, the company generated $10.5 million from operations.  That’s a huge improvement over the $19 million in cash the business sucked up last year.

While financially the company looks stable right now, let’s dig into some risks…

Investment Risks

Now OMNOVA isn’t without its risks.

Downturns in any of their key industries, or the economy as a whole, could crush the company.

Losing a key customer, or being slapped with an EPA regulation or OSHA review, could hurt as well.

Heck, the company also has a ton of debt due in 2018.  If they can’t refinance that, or find a way to pay it off, the stock is in trouble.

Read their 10-K for a list of everything that could go wrong…

Potential Returns of 100% or More

Despite the risks, OMNOVA has some significant potential.

If they can keep their margins growing and hold onto product price increases, I could see sales jump significantly.  Fat sales and a solid profit margin will provide nice net income… which will drive the stock higher.

Any jump in earnings would be a huge boon to the stock potentially driving it higher by 100% or more.

How high could the stock go?

It’s anybody’s guess… but with a recent price of around $6.60, I could see it double or more.

Keep in mind, the company is speaking at the Jeffries Conference on August 12 in New York.  A solid performance should push the price higher.

Also, any good news, like the recent product price increases… will help support the stock as well.

Get in now to grab the stock near the lows for the year!


Name:                          OMNOVA Solutions Inc.

Ticker Symbol:                                            OMN

Market Cap:                                    $303 million

Recent Price:                                              $6.60

PSB Rating System      4.4 Stars 

Raging Revenue:  (4.5 stars) The Company posted $220 million in sales last quarter, down from the year prior… However, the company sells into three areas of hot industry growth – construction, paper, and transportation.

Beautiful Books: (4.3 stars) With gross profit holding strong, business is looking good.  The company needs to reign in other expenses and hold the line to continue growing profits!

Stellar Structure: (4.3 stars) The balance sheet is decent.  They have over $200 million due in 2018… which gives the company time to pay it off, or re-paper the debt.

Valuation Verification: (4.6 stars) OMN is trading at lows for the year, giving us a perfect opportunity to pick up the shares cheap.

Meaningful Milestones: (4.3 stars) OMN is presenting at a key investment conference this month.  Recent press about increasing prices is exciting… future announcements of improving business metrics will drive the stock higher.

Action Recommendation

Buy OMNOVA Solutions Inc. (OMN) up to $6.90 per share. 

Recent price is $6.60. 

Don’t forget your position sizing and stop-loss rules.

OMNOVA Solutions


Position Updates

Here are some highlights from the past couple weeks…

  • Angies List (ANGI) – This is getting ugly… The company announced weak sales and a loss. I’m not seeing the stock recover any time soon, exit today to preserve capital.
  • Marin Software (MRIN) – The company is releasing earnings right when we go to press. Watch the stock closley after earnings on the 5th.
  • Broadwind Energy (BWEN) – Earnings were released late last week, and they looked strong. While revenue was down… new bookings and backlog are strong… and the company reported Q2 EPS of $0.11… We’re moving the company to a HOLD.
  • Marchex (MCHX) – The company is announcing earnings as we go to press, watch the earnings release on the 5th.
  • Demand Media (DMD) – Another company announcing earnings as we go to press. Watch for the earnings on the 6th.
  • Glu Mobile (GLUU) GLUU just announced earnings.  Revenue was up 64% over last year… but oprating expenses are still too high.  The cash position remains strong with $189 million.  Hold tight.
  • USA Technologies (USAT) – Time to sell this winner… we’ve doubled our money… so take your profits!
  • Gain Capital (GCAP) – Yet another company announcing earnings as we go to press, watch for the earnings on the 6th!
  • NetSol (NTWK)  While the quarter wasn’t announced yet, the company did announce they expect revenue between $49.5 and $50.5 and the stock moved higher on the news… We should get the quarterly numbers sometime in September.  Hold this one tight.
  • BrightCove (BCOV) – This is ugly. The company announced earnings… or should I say a loss for the quarter.  While revenue is up a bit, losses were $0.11 a share… and cash flow from operations were cut in half.  It’s time to sell and deploy our capital elsewhere.
  • Carriage Services (CSV) – This stock continues to stay strong… we’re up over 360% on this trade and the company continues to perform. Revenue is up, earnings are up, and cash flow is up!  Keep holding for bigger gains!

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