Yesterday, PolyOne Corp. (POL) reported 2008 1st quarter earnings. EPS came in at 7 cents per share vs. 8 cents per share for the same quarter last year. The hit, if you want to call it that, came from the company's GEON Performance Polymers segment, which is the vinyl business. The company has been warning of the drop in the vinyl business due to housing and automotive slowdown since last year, and I have reported it here as well. It should be no surprise to the street that PolyOne would experience a drop in revenue and operating income in this segment. Here is the breakdown: GEON revenue down 4.3% while Operating Income fell 65.2% from the year ago period. The hit comes with the fact the GEON is PolyOne's largest reportable segment, accounting for 35.3% of total sales in 2007. Another factor besides the housing slowdown was an increase in raw material prices, specifically ethylene, so the continued rise in energy prices is not helping this situation. The bad news is the housing sector. There seems to be no end to the downturn. As much as you hear in the news about the end drawing near, it is yet to be seen. Although GEON took a hit, let us look at the other reportable segments, which I basically believe the street has overlooked.
International Color and Engineered Materials: Revenue up 14.7% and Operating Income up 30%.
PolyOne Distribution: Revenue up 9.1% and Operating Income up 19.6%.
Specialty Engineered Materials: Revenue up 102% and Operating Income up 400%.
All Other segment: Revenue down 5.2% but Operating Income up 167%.
These are all in comparison to 2007 1st quarter.
After looking through the press release and reviewing the numbers, I was actually impressed with the way the 4 other reportable segments turned out this quarter. The company is sticking to its strategy and turning itself away from a commodity business into a specialty business. I think the biggest plus here is the fact that they were only down 1 cent from 2007 1st quarter when there was a $13.3 million drop in Operating Income in the vinyl business from 1st quarter 2007. This, to me, is a real coup for the company.
I went back and reviewed my DCF model for PolyOne believing that I would need to revamp it to come closer in line to the company's earnings report yesterday, and to rework revenue figures in the Pro Forma years using management's new estimates. At the end of fiscal 2007, management believed that going forward, revenue would grow at a rate between 8% and 12%. Yesterday, they brought that figure a little lower to a range of 7% to 10%. My model has revenue growing at a conservative 6% through 2011, and then an extremely conservative 3% in the Terminal Year 2012. I also was very aggressive in the modeling of input costs, probably more than necessary. Therefore, my valuation of PolyOne still stands at $13.46 per share. The stock closed today down 43 cents to $6.79. This is almost a 50% discount from my fair value estimate. I still think this stock is a great value play. Eventually, the street will wake up and see how this company's management has differentiated this company from its competitors and decide to unlock the true value of the stock.
I am posting the link to the transcript of PolyOne's conference call today. It is worth your time to read through it.
http://seekingalpha.com/article/76128-polyone-corporation-q1-2008-earnings-call-transcript?source=yahoo
International Color and Engineered Materials: Revenue up 14.7% and Operating Income up 30%.
PolyOne Distribution: Revenue up 9.1% and Operating Income up 19.6%.
Specialty Engineered Materials: Revenue up 102% and Operating Income up 400%.
All Other segment: Revenue down 5.2% but Operating Income up 167%.
These are all in comparison to 2007 1st quarter.
After looking through the press release and reviewing the numbers, I was actually impressed with the way the 4 other reportable segments turned out this quarter. The company is sticking to its strategy and turning itself away from a commodity business into a specialty business. I think the biggest plus here is the fact that they were only down 1 cent from 2007 1st quarter when there was a $13.3 million drop in Operating Income in the vinyl business from 1st quarter 2007. This, to me, is a real coup for the company.
I went back and reviewed my DCF model for PolyOne believing that I would need to revamp it to come closer in line to the company's earnings report yesterday, and to rework revenue figures in the Pro Forma years using management's new estimates. At the end of fiscal 2007, management believed that going forward, revenue would grow at a rate between 8% and 12%. Yesterday, they brought that figure a little lower to a range of 7% to 10%. My model has revenue growing at a conservative 6% through 2011, and then an extremely conservative 3% in the Terminal Year 2012. I also was very aggressive in the modeling of input costs, probably more than necessary. Therefore, my valuation of PolyOne still stands at $13.46 per share. The stock closed today down 43 cents to $6.79. This is almost a 50% discount from my fair value estimate. I still think this stock is a great value play. Eventually, the street will wake up and see how this company's management has differentiated this company from its competitors and decide to unlock the true value of the stock.
I am posting the link to the transcript of PolyOne's conference call today. It is worth your time to read through it.
http://seekingalpha.com/article/76128-polyone-corporation-q1-2008-earnings-call-transcript?source=yahoo
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