PolyOne Corporation (POL)
Recent Price: $7.70 Market Capitalization: $718.002 million
PolyOne is the leader in North America and Europe for polymer compounds and polymer coating systems. The company has set forth four strategic goals that they are looking to reach by 2010. The first, consistent, double-digit income in their core business, second, gross margins of 25-35% for specialty businesses, third, 30% of revenue from outside North America, and fourth, a vitality index of 25%, the percentage of total sales attributable to new products, services or markets developed in the last five years. In my opinion, I believe that PolyOne will accomplish these goals due to a strong management team whose focus is on the customer. By becoming a truly customer centric company, Polyone will become a “one stop” shop that can provide vinyl compounds, color technology, engineering materials, and polymer coatings along with distribution services that will serve the entire needs of its customers. Currently, no competitor can offer this solution.
2006 saw PolyOne generate over $100 million in cash from operations for the first time since its inception. This milestone was achieved by generating strong earnings, as well as a disciplined management of working capital. However, in 2007 cash from operations was $67.2 million, down $44.5 million from 2006. This decrease was caused by lower operating earnings, as well as lower earnings and distributions from affiliates. From 2003 to 2007, PolyOne has increased its working capital by 35%. This cash was used to pay down a significant portion of the company’s high cost debt. Consequently, the current ratio of PolyOne has increased from .97 in 2001 to 1.83 in 2007, which is higher than its two closest competitors, Ferro Corp, and Georgia Gulf. PolyOne achieved a 2007 ROIC of 3.9% and in 2006 a Return on Invested Capital (ROIC) of 15.4%, which was 4.3 % higher than its Cost of Capital. The 2007 ROIC decrease can be accounted for by the decrease in Long-term debt, which the company paid down during 2007. PolyOne has also managed to increase its free cash flow to sales ratio over the past 5 years, while both Ferro Corp. and Georgia Gulf have seen a decrease in free cash flow to sales ratio over the same period. As of 2007, PolyOne’s free cash flow to sales ratio was 2% versus 6% for Ferro Corp. and 3% for Georgia Gulf.
However, investors must be made aware that this industry is treated as a commodity business and therefore, fiercely competitive. Raw material prices play a significant role in the profitability of the company and thus far they have been able to pass along input price increases to the customer. This can be seen in the sales volume decrease in 2006 although revenues were higher in that year. If PolyOne can no longer pass through these higher costs to the customer, I see harm to their long-term profitability.
Company Overview
Polyone Corporation is a leading global provider of specialized polymer materials, services and solutions that serve industrial, commercial and consumer markets. PolyOne operates in four reportable segments: Vinyl Business (33.6% of total 2007 sales), International Color and Engineered Materials Business (22.01% of total 2007 sales), PolyOne Distribution (26.81% of total 2007 sales), and All Other (17.58% of total 2007 sales), which includes North American Color and Additives, North American Engineered Materials, Producer Services, and Polymer Coating Systems. End use markets include automotive, building materials, consumer durables, electrical/electronic, industrial, medical, nondurable goods, and wire and cable. In the automotive space, Polyone manufactures color additives for interior and exterior automotive trim, polymer coating systems for armrests and headrests, and engineered materials for interior and exterior structural applications. The building materials business manufactures vinyl compounds for windows, pipe fittings, decking and fencing. In the nondurable goods business, Polyone manufactures vinyl compounds and color additives for packaging applications such as cosmetic, beverage and food bottles and caps.
Strategy: I believe that PolyOne can build a sustainable competitive advantage by working together as one corporate entity to capture value through innovative business solutions. This involves integrating all businesses in the company; working together as one instead of many. By doing so, PolyOne will take advantage of its entire product line to serve all the needs of each individual customer. A strong management team has committed itself to being customer centric. By building a Key Account team consisting of Strategic Account Managers (SAM) and Business Development Managers (BDM), I believe that PolyOne will be able to strategically align itself with its customer’s goals. The SAM’s will be responsible for driving revenue growth through PolyOne’s largest strategic customers. The BDM’s will work with OEM’s to develop new market penetration through application engineering and cross-selling market development.
Financial Overview
Growth: For the year ending 2007, total sales were $2.642 billion compared to $2.622 billion for the year ending 2006, a .76% increase. The nearly unchanged growth was due to weaker automotive and construction demand in North America. However, prior sales growth has been strong averaging 8.0% from 2004-2007. 2007 Sales in the United States declined 4% over the year, caused by a decline in housing and automotive. However, international growth rates continue to be strong. Sales in Asia were 12.4% higher over 2006 and sales in Canada were 1.4% higher over 2006. European sales also showed improvement with sales in that geographic area increasing by 16.1% over 2006. In December 2007, PolyOne completed the acquisition of the assets of a Chinese plastics company. This is PolyOne’s fourth China-based manufacturing site and will provide PolyOne with a vinyl compounding facility in China. In 2007, the company also added its third specialized color design center in China. PolyOne’s dedication to its global customers, and international growth markets should help the company fuel continued growth.
Profitability:
PolyOne has been able to increase its Return on Net Operating Assets (RNOA) from 7.5% in 2004, 9.4% in 2005 to 15.5% in 2006. However, PolyOne’s RNOA in 2007 stood at 3.9%. De-leveraging caused this decrease, as PolyOne paid down its long-term debt. PolyOne’s 2007 RNOA is higher than its two closest competitors RNOA. Return on Equity (ROE) has also increased historically, but fell off dramatically in 2007. However, between it and its 2 competitors, PolyOne is the only company whose ROE was positive in 2007, standing at 1.9%. PolyOne’s Profit Margin in 2007 was 1.6%, which was higher than its two closest competitors, whose profit margins were negative in 2007.
Risks:
Execution of long-term strategy is key. It is my belief that they must be able to sell its customers on the concept of the Key Account team, and by doing so, add value if the team can create new market penetration and work with its strategic customer accounts to sell everything from the design to the finished product, as well as the final distribution. However, it is my opinion that if PolyOne cannot achieve the goals set out by the Key Account team, then each customer will ultimately deal with the company that can offer it the best price, thus turning PolyOne into a commodity supplier.
Raw materials such as ethylene and benzene are primary chemicals used in the manufacture of vinyl and engineered resins. Therefore, rising energy prices have an adverse effect on the company’s bottom line.
Due to the makeup of the Vinyl Business, I believe that any prolonged slowdown in the housing sector will have an adverse effect on sales, as was the case in the second half of 2006, and all of 2007. Slowing building and reconstruction proved to be difficult on this business as 2007 Vinyl sales fell 9% year over year.
So far, PolyOne has been able to increase its prices to offset costs and lower sales volume. It is my opinion that if PolyOne cannot continue to sell to its customers at higher prices to negate the increase in raw material prices, revenue figures will be adversely affected going forward.
Valuation
I have calculated a fair value price of PolyOne of $13.46 per share using a DCF model. Using historical growth rates, managements estimates going forward, and continued strong international sales, I have modeled sales growth at 6.0% from 2007 through 2012 while the company sets in motion its strategic plan. I have calculated PolyOne’s Weighted Average Cost of Capital (WACC) to be 9.79%. However I have used the Adjusted Present Value DCF method to value this firm, and therefore, I will use the company’s Unlevered cost of equity (Rue), which I have calculated to be 10.6%, to discount the future free cash flows. I believe that any global economic slowdown in automotive and housing will negatively affect PolyOne’s sales growth.
2006 saw PolyOne generate over $100 million in cash from operations for the first time since its inception. This milestone was achieved by generating strong earnings, as well as a disciplined management of working capital. However, in 2007 cash from operations was $67.2 million, down $44.5 million from 2006. This decrease was caused by lower operating earnings, as well as lower earnings and distributions from affiliates. From 2003 to 2007, PolyOne has increased its working capital by 35%. This cash was used to pay down a significant portion of the company’s high cost debt. Consequently, the current ratio of PolyOne has increased from .97 in 2001 to 1.83 in 2007, which is higher than its two closest competitors, Ferro Corp, and Georgia Gulf. PolyOne achieved a 2007 ROIC of 3.9% and in 2006 a Return on Invested Capital (ROIC) of 15.4%, which was 4.3 % higher than its Cost of Capital. The 2007 ROIC decrease can be accounted for by the decrease in Long-term debt, which the company paid down during 2007. PolyOne has also managed to increase its free cash flow to sales ratio over the past 5 years, while both Ferro Corp. and Georgia Gulf have seen a decrease in free cash flow to sales ratio over the same period. As of 2007, PolyOne’s free cash flow to sales ratio was 2% versus 6% for Ferro Corp. and 3% for Georgia Gulf.
However, investors must be made aware that this industry is treated as a commodity business and therefore, fiercely competitive. Raw material prices play a significant role in the profitability of the company and thus far they have been able to pass along input price increases to the customer. This can be seen in the sales volume decrease in 2006 although revenues were higher in that year. If PolyOne can no longer pass through these higher costs to the customer, I see harm to their long-term profitability.
Company Overview
Polyone Corporation is a leading global provider of specialized polymer materials, services and solutions that serve industrial, commercial and consumer markets. PolyOne operates in four reportable segments: Vinyl Business (33.6% of total 2007 sales), International Color and Engineered Materials Business (22.01% of total 2007 sales), PolyOne Distribution (26.81% of total 2007 sales), and All Other (17.58% of total 2007 sales), which includes North American Color and Additives, North American Engineered Materials, Producer Services, and Polymer Coating Systems. End use markets include automotive, building materials, consumer durables, electrical/electronic, industrial, medical, nondurable goods, and wire and cable. In the automotive space, Polyone manufactures color additives for interior and exterior automotive trim, polymer coating systems for armrests and headrests, and engineered materials for interior and exterior structural applications. The building materials business manufactures vinyl compounds for windows, pipe fittings, decking and fencing. In the nondurable goods business, Polyone manufactures vinyl compounds and color additives for packaging applications such as cosmetic, beverage and food bottles and caps.
Strategy: I believe that PolyOne can build a sustainable competitive advantage by working together as one corporate entity to capture value through innovative business solutions. This involves integrating all businesses in the company; working together as one instead of many. By doing so, PolyOne will take advantage of its entire product line to serve all the needs of each individual customer. A strong management team has committed itself to being customer centric. By building a Key Account team consisting of Strategic Account Managers (SAM) and Business Development Managers (BDM), I believe that PolyOne will be able to strategically align itself with its customer’s goals. The SAM’s will be responsible for driving revenue growth through PolyOne’s largest strategic customers. The BDM’s will work with OEM’s to develop new market penetration through application engineering and cross-selling market development.
Financial Overview
Growth: For the year ending 2007, total sales were $2.642 billion compared to $2.622 billion for the year ending 2006, a .76% increase. The nearly unchanged growth was due to weaker automotive and construction demand in North America. However, prior sales growth has been strong averaging 8.0% from 2004-2007. 2007 Sales in the United States declined 4% over the year, caused by a decline in housing and automotive. However, international growth rates continue to be strong. Sales in Asia were 12.4% higher over 2006 and sales in Canada were 1.4% higher over 2006. European sales also showed improvement with sales in that geographic area increasing by 16.1% over 2006. In December 2007, PolyOne completed the acquisition of the assets of a Chinese plastics company. This is PolyOne’s fourth China-based manufacturing site and will provide PolyOne with a vinyl compounding facility in China. In 2007, the company also added its third specialized color design center in China. PolyOne’s dedication to its global customers, and international growth markets should help the company fuel continued growth.
Profitability:
PolyOne has been able to increase its Return on Net Operating Assets (RNOA) from 7.5% in 2004, 9.4% in 2005 to 15.5% in 2006. However, PolyOne’s RNOA in 2007 stood at 3.9%. De-leveraging caused this decrease, as PolyOne paid down its long-term debt. PolyOne’s 2007 RNOA is higher than its two closest competitors RNOA. Return on Equity (ROE) has also increased historically, but fell off dramatically in 2007. However, between it and its 2 competitors, PolyOne is the only company whose ROE was positive in 2007, standing at 1.9%. PolyOne’s Profit Margin in 2007 was 1.6%, which was higher than its two closest competitors, whose profit margins were negative in 2007.
Risks:
Execution of long-term strategy is key. It is my belief that they must be able to sell its customers on the concept of the Key Account team, and by doing so, add value if the team can create new market penetration and work with its strategic customer accounts to sell everything from the design to the finished product, as well as the final distribution. However, it is my opinion that if PolyOne cannot achieve the goals set out by the Key Account team, then each customer will ultimately deal with the company that can offer it the best price, thus turning PolyOne into a commodity supplier.
Raw materials such as ethylene and benzene are primary chemicals used in the manufacture of vinyl and engineered resins. Therefore, rising energy prices have an adverse effect on the company’s bottom line.
Due to the makeup of the Vinyl Business, I believe that any prolonged slowdown in the housing sector will have an adverse effect on sales, as was the case in the second half of 2006, and all of 2007. Slowing building and reconstruction proved to be difficult on this business as 2007 Vinyl sales fell 9% year over year.
So far, PolyOne has been able to increase its prices to offset costs and lower sales volume. It is my opinion that if PolyOne cannot continue to sell to its customers at higher prices to negate the increase in raw material prices, revenue figures will be adversely affected going forward.
Valuation
I have calculated a fair value price of PolyOne of $13.46 per share using a DCF model. Using historical growth rates, managements estimates going forward, and continued strong international sales, I have modeled sales growth at 6.0% from 2007 through 2012 while the company sets in motion its strategic plan. I have calculated PolyOne’s Weighted Average Cost of Capital (WACC) to be 9.79%. However I have used the Adjusted Present Value DCF method to value this firm, and therefore, I will use the company’s Unlevered cost of equity (Rue), which I have calculated to be 10.6%, to discount the future free cash flows. I believe that any global economic slowdown in automotive and housing will negatively affect PolyOne’s sales growth.
Industry Peers
Market Cap 2007 Revenues 2007 RNOA 2007 ROE
PolyOne $718.002M $2642.70M 3.9% 1.9%
Ferro Corp $648.91M $2204.76M -5.4% -18.7%
Georgia Gulf $236.62M $3157.274M -10.3% -89.4%
Market Cap 2007 Revenues 2007 RNOA 2007 ROE
PolyOne $718.002M $2642.70M 3.9% 1.9%
Ferro Corp $648.91M $2204.76M -5.4% -18.7%
Georgia Gulf $236.62M $3157.274M -10.3% -89.4%
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