We believe that Stepan Company (SCL - Free Report) is a solid choice for investors, seeking exposure in the chemical space. Healthy growth opportunities in two business segments, programs driving internal efficiencies and buyout gains, will continue to work in favor of the company.
The stock, with $1.9 billion of market capitalization, has been upgraded to a Zacks Rank #1 (Strong Buy) on Mar 14. Its investment appeal is further accentuated by a VGM Score of A.
Stepan Company delivered better-than-expected earnings in two of the last four quarters, recording an average positive earnings surprise of 15.70%. Notably, the company’s shares have rallied 7.2% in the last three months, outperforming 2% gain of the industry.
Why the Upgrade?
We are providing a snapshot of how Stepan Company fared in the fourth quarter of 2017. Its earnings of $1.06 surpassed the Zacks Consensus Estimate by 58.21% and also surged 104% over the year-ago quarter’s tally. Net sales were up 13% on the back of higher selling price, rise in volumes sold and forex gains. On a segmental basis, results were impressive for Surfactants and Polymers.
In the quarters ahead, Stepan Company believes that Surfactants segment has the solid growth potential in oilfield chemicals, agricultural and construction markets as well as from Tier 2 and 3 customers. Moreover, the company is working toward improving asset utilization in the U.S. laundry business and reducing fixed costs. For the Polymers segment, the company anticipates gaining from conservation efforts in the global energy market. Also, prospects in the insulation market and capacity additions in Asia, Europe and the U.S. will benefit.
In addition, the company’s efforts for expansion in existing markets and penetrating into new markets, as well as innovating new products, are worth mentioning. Its DRIVE program focuses on improving internal efficiencies through effective procurement, supply chain optimization and reduction in selling, general and administrative expenses. Acquisition of meaningful businesses will be advantageous too. In June 2017, the company agreed to acquire BASF Mexicana’s surfactant production facility in Mexico and some of its related surfactants business. The buyout is anticipated to close in the first quarter of 2018.
For 2018, Stepan Company anticipates capital expenditures to be $105-$115 million, while the company will work toward repaying the debt of $20.7 million. Also, the lower tax rate of 20-23% versus 34% in 2017 will be beneficial.
In last 30 days, earnings estimates for Stepan Company were revised upward by two brokerage firms for 2018 and by one for 2019. Per a 30-day ago tally, the Zacks Consensus Estimate is pegged at $5.17 for 2018 and $5.79 for 2019, reflecting the increase of 10% and 6.2%, respectively.
Stepan Company Price and Consensus