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Luxfer's Neo Performance Buyout to Boost Earnings Prospects

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Luxfer Holdings PLC (LXFR - Free Report) recently signed a definitive agreement to acquire Neo Performance Materials Inc. (Neo) for $612 million, in stock and cash. The deal will likely accelerate the company’s strategy to become the primary producer of highly-engineered advanced materials worldwide. The acquisition, which is currently subject to customary regulatory clearances and shareholders’ approval; will likely close by second-quarter 2019.

Inside the Headlines

Toronto-based Neo is a renowned manufacturer of rare metal and earth-based functional materials. The state-of-the-art products offered by the company are deployed in various advanced technologies across the globe. The company has an excellent operating model and its nine production facilities include significant amount of additional capacity to support growth in future. For the 12-month period ended Sep 30, 2018, the company has generated $454-million revenues and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $69 million.

Deal Rationale

Luxfer will likely become a $947-million advanced materials manufacturer on the back of this acquisition. The deal will strengthen the company’s existing product portfolio, expand its business reach in high-growth Asian markets, diversify the customer base and create new input procurement paths. Notably, Luxfer stated that with the inclusion of Neo’s business, it would be able to provide superior services to its existing rare earth oxides and chemical customers.

Moving ahead, the acquisition will be accretive to the company’s earnings per share growth and will likely bring in cost synergies of at least $15 million. Moreover, combination of Neo’s Oxides and Chemical business unit with Luxfer’s zirconium chemicals business is expected to create some added growth synergies in the quarters ahead. Luxfer has arranged $375 million from a syndicated term loan B to refinance existing debt, and fund the cash portion for the Neo transaction (including the fees and expenses and purchase price).

Price Performance

Over the past year, Luxfer’s shares have rallied 28%, as against the 12.4% loss recorded by the industry it belongs to.

This Zacks Rank #1 (Strong Buy) stock is poised to grow on the back of stellar sales of its major product lines (zirconium, SoluMag, aluminum cylinders and fuel cylinders), new global contracts, pricing initiatives and greater operational excellence. Post the Neo acquisition, Luxfer anticipates maintaining its annual EBITDA growth rate within 8-10%. Per our estimates, Luxfer’s year-over-year earnings growth rate is currently pegged at 63.7% and 13.8% for 2018 and 2019, respectively.

Other Stocks to Consider

Some other top-ranked stocks in the same space are listed below:

DXP Enterprises, Inc. (DXPE - Free Report) also sports a Zacks Rank of 1. The company pulled off a positive average earnings surprise of 112.62% in the past four quarters. You can see the complete list of today’s Zacks #1 Rank stocks here.

Applied Industrial Technologies, Inc. (AIT - Free Report) carries a Zacks Rank #2 (Buy). The company has delivered positive average earnings surprise of 11.67% in the trailing four quarters.

Graco Inc. (GGG - Free Report) also holds a Zacks Rank of 2. The company generated positive average earnings surprise of 4.05% in the preceding four quarters.

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