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Bear of the Day: Kronos (KRO)

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Earnings estimates have fallen sharply for Kronos Worldwide (KRO - Free Report) after the company delivered disappointing second quarter results on August 7. The drop in consensus estimates was large enough to send the stock to a Zacks Rank #5 (Strong Sell), placing it in the bottom 5% of all stocks that Zacks ranks.

While shares have been beaten up this year, the stock does not look cheap at more than 20x forward earnings.

Kronos Worldwide manufactures titanium oxide pigments. TiO2 is a fine white powder used in products like paints, plastics and paper to give them maximum whiteness and opacity.

Approximately half of its sales volume was into European markets in the first half of 2015.

Disappointing Second Quarter Results

Kronos reported disappointing second quarter results on August 7. Adjusted earnings per share came in at -$0.08, well below the Zacks Consensus Estimate of +$0.23. It was also down from EPS of +$0.29 in the same quarter last year.

Net sales plunged 19% to $360.2 million, missing the consensus of $396.0 million. This was driven in large part by a 13% drop in its average TiO2 selling prices, due in part by competitive pressures. The company also faced significant foreign currency headwinds in the quarter. These factors were partially offset by higher sales volumes.

The gross margin declined in the quarter as lower raw material costs were more than offset by the drop in selling prices. Additionally, through the first six months of the year, operating cash flow fell by more than 50% year-over-year to just $8.3 million. That was not enough to cover its $19.3 million in capital expenditures or $34.8 million in dividends over the same period.

Estimates Falling

Following weak second quarter results, management stated that it expects operating income to be significantly lower in 2015 than in 2014 due to lower anticipated average selling prices of TiO2. The company also initiated a restructuring plan in the second quarter, which includes planned workforce reductions over the next few quarters.

Analysts revised their earnings estimates significantly lower for the remainder of the year as well as for 2016. This was sharp enough to send the stock to a Zacks Rank #5 (Strong Sell), placing it in the bottom 5% of all stocks that Zacks ranks based on earnings momentum.

The current Zacks Consensus Estimate for 2015 is $0.36, down from $0.78 just sixty days ago. The 2016 consensus is now $0.41, down from $0.98 over the same period.

Lofty Valuation

Shares of Kronos have been beaten up this year, but they do not look like a bargain. The stock trades at more than 20x 12-month forward earnings and has a trailing twelve month free cash flow yield of just 2.5%.

The Bottom Line

With falling sales, falling profit margins, falling earnings estimates and premium valuation, investors should consider avoiding shares of Kronos for now.

Todd Bunton, CFA is a Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor and Surprise Trader services.

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