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Growth & Income

A. Schulman, Inc. (SHLM - Snapshot Report) recently delivered better than expected results for the first quarter of its fiscal 2012 as earnings per share jumped 53% year-over-year.

Analysts revised their estimates higher for the rest of 2012, sending the stock to a Zacks #2 Rank (Buy). Based on current consensus estimates, analysts expect double-digit EPS growth over the next few years.

On top of this, the company pays a dividend that yields a solid 3.1%. Valuation looks attractive too, with shares trading at less than 10x forward earnings.

Be Greedy When Others Are Fearful

A. Schulman manufactures high-performance plastic compounds and resins used in a variety of consumer, industrial, automotive and packaging applications. Over two-thirds of its revenue comes from the Europe, Middle East and Africa (EMEA) region.

As an economically-sensitive company, A. Schulman sold off heavily in the second half of 2011 as investors feared a significant global economic slowdown in 2012. The stock has come back a bit since then, but it still well below its 52-week highs despite strong business performance.

But if these fears turn out to be overblown, the stock could see a lot of upside.

First Quarter Results

A. Schulman reported very strong results for the first quarter of its fiscal 2012 on January 5. Earnings per share came in at 52 cents, crushing the Zacks Consensus Estimate by 10 cents. It was a whopping 53% increase over the same quarter in 2010.

Net sales rose 4% to $517.3 million, driven by a higher average selling price per pound due to improved mix, partially offset by lower volume. Sales in the first quarter were divided as follows:

Europe, Middle East and Africa (EMEA): 68%
The Americas: 25%
Asia Pacific (APAC): 7%

Sales were up across each region, but growth was strongest in The Americas, which saw 11% top-line growth. APAC saw 8% sales growth, while the EMEA region rose 2%.

Gross profit per pound rose 10% year-over-year to 15.2 cents. The company did a great job controlling costs in the quarter, as selling, general and administrative expenses fell from 10.5% to 9.1% of sales.

Overall, these factors led to a stellar 30% increase in operating income.

Outlook

Management stated in its first quarter press release that "the fiscal 2012 second quarter is expected to be challenged by declining demand in Europe." But they also expect volume declines to be offset from continued restructuring efforts and SG&A cost controls.

Moreover, the majority of its European business is in the northern section, which is much stronger and more resilient than the southern portion.

Analysts actually raised their estimates for the remainder of 2012, sending the stock to a Zacks #2 Rank (Buy). The 2012 consensus estimate is now $2.11, representing 13% growth over 2011 EPS. The 2013 consensus estimate is currently $2.47, corresponding with 17% EPS growth.

Dividend

On top of this strong growth, A. Schulman pays a dividend that yields a solid 3.1%. The company raised its dividend by 10% in October 2011.

Over the last 10 years, it has increased its dividend at a compound annual rate of 2%.

Valuation

If fears over a global economic slowdown in 2012 and its effects on A. Schulman are overblown, which analysts seem to believe, then valuation looks very attractive. Shares trade at just 9.6x 12-month forward earnings, a significant discount to its 10-year median of 14.9x.

Its price to book ratio is just 1.2, below the industry median of 1.4.

The Bottom Line

With rising estimates, strong growth projections, a solid 3.1% dividend yield, and attractive valuation, A. Schulman offers a lot of upside potential.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Co-Editor of the Reitmeister Value Investor.

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