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Bear of the Day: Chemtura (CHMT)

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Chemtura (CHMT) recently delivered disappointing third quarter results as it missed consensus estimates on both the top and bottom lines.

Analysts revised their estimates meaningfully lower for both 2013 and 2014 following the Q3 miss, sending the stock to a Zacks Rank #5 (Strong Sell).

With shares trading well above their historical median on both a price/earnings and price/book basis, investors should consider avoiding this stock until its earnings momentum improves.

Chemtura manufactures and markets specialty chemicals, agrochemicals and pool, spa and home care products.

Third Quarter Results

Chemtura reported disappointing third quarter results on November 4. Adjusted earnings per share came in at 10 cents, well below the Zacks Consensus Estimate of 22 cents. It was a 52% decline from the same quarter last year.

Sales rose 4% to $569 million, missing the consensus of $612 million. Top-line growth in the 'Industrial Performance Products' segment more than offset weakness in the 'Industrial Engineered Products' segment.

However, profit margins declined significantly. Total operating profit fell to just 5.8% of net sales, down from 9.3% in the same quarter last year. Segment operating income plunged 35%, driven mainly by significant weakness in 'Industrial Engineered Products'. This was due to lower selling prices and weaker volumes year-over-year for the company's brominated products, which are used in the insulation foam and electronic applications.

Estimates Falling

Following the Q3 miss, analysts revised their estimates significantly lower for Chemtura for both 2013 and 2014. This sent the stock to a Zacks Rank #5 (Strong Sell).

The Zacks Consensus Estimate for 2013 is now $0.63, down from $1.07 just 60 days ago. The 2014 consensus is currently $1.02, down from $1.58 over the same period. You can see the negative earnings momentum in the company's 'Agreement' and 'Magnitude' charts:

Premium Valuation

Despite the negative earnings momentum, shares of Chemtura are trading at premium valuations. The 12-month forward price/earnings ratio is a lofty 24x, well above its historical median of 13x. It is also a premium to the industry median of 21x.

Its price to book ratio of 2.6 is also well above its historical median of 1.5.

The Bottom Line

With negative earnings momentum and premium valuation, investors should consider avoiding Chemtura for now.

Todd Bunton, CFA is the Growth & Income Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor service.

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