By:
John Nick, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• Innospec Inc. (NYSE:IOSP) develops, blends and supplies fuel
additives, oilfield chemicals, personal care, and specialty chemicals through
the following segments: Fuel Specialties, Performance chemicals, Oilfield
Services, and Octane Additives. The Fuel specialties segments supplies a
variety of specialty chemical products that act as additives to fuel,
distributing primarily to aviation and marine applications. The Performance
chemicals segment provides technology-based solutions for customers’ processes
or products focused in the personal care, agrochemical and mining
industries. The Oilfield Services
segment develops and markets products to prevent loss of mud in drilling
operations, chemical solutions for fracturing, stimulation and completion
operations, and products for oil and gas production. The Octane Additives
segment produces tetra ethyl lead for use in automotive gasoline and trading.
• IOSP recently reached
its 52-week high (107.10 ion 11/06/19) as a result of historically high revenues
in the third quarter of FY 19’. These revenues were primarily driven by Fuel
Specialties and Oilfield Services.
• Eco-friendly initiatives
including IMO continue to drive IOSP revenues and seem to offer vast potential
for Innospec moving forward.
• Management recently
announced an ex-dividend on the 13th of November incentivizing investors
to purchase shares before the 18th in order to receive a $.50
dividend payable on the 29th of November.
Key
points:
Management has focused on
increasing gross margins while keeping performance strong in a struggling
industry. The chemical product industry has steadily declined from 2014-19 at
an annualized rate of -.4% and is expected to continue this shrinkage at a rate
of -.3% over the next five years through 2024. The primary reason for Innospec’s ability to
fight these headwinds in a struggling industry is largely attributed to their
diverse product portfolio. They have recently expanded upon this portfolio with
their Drag Reducing Agents (DRAs) business.
IOSP has continued to
capitalize on their diversified product portfolio through the most recent
quarter by showing a 2% growth in third quarter sales despite a 13% decrease in
Performance Chemicals sales by increasing sales in their Fuel Specialties and
Oilfield Services segments by 7% and 17% respectively. Further, they have
increased their operating income and EBITDA by 14% by increasing their margins.
With this cash flow they have reduced debt to 22 million, a mere .1X EBITDA.
IOSP has capitalized on
the paradigm shift towards a more environmentally conscious society. Their Fuel
Specialties and Oilfield Services segments have especially benefitted from this
shift. For Fuel Specialties, the International Maritime Organization’s (IMO) initiative
has been a primary driver of growth. The IMO is the UN’s body responsible for
the safety and environmental impact of the shipping sector. Their 2020 initiative
states that they will reduce the global sulfur cap to .5% by 2020, from a cap
of 3.5% at the time of announcement. Innospec has a specialty in sulfur
reduction and this has positioned them to benefit from these regulations.
What
has the stock done lately?
Innospec released its
quarter 3 earnings report on November 5, 2019 and hit its historic and 52 week
high at $107.10 intraday on the 6th, closing at $100.31. Currently
it is priced at $98.52 a share and shows stable pricing relative to its 52-week
high about of month ago.
Past
Year Performance:
IOSP has increased in value by more than
59% over the past year. This growth is incredible but the main question become:
is this growth sustainable. It recently hit its record high and Innospec is
aware that these immense growth rates are not consistently obtainable. However,
investors are optimistic about Q4 earnings are believe stable growth will be
within IOSP’s capabilities. Further, Debt has been substantially reduced over
the past year and management enjoys rewarding shareholders by distributing
excess cash towards dividends.
Source:
FactSet
My
Takeaway
Innospec’s strong performance in a struggling
specialty chemical industry is certainly an impressive feat as well as a strong
positive for shareholders. By leveraging their product portfolio
diversification they are battling the cyclicality of the industry and should be
able to see strong performance going forward. Further, IOSP shows constant
hungry for growth as it has shifted its product portfolio into the increasingly
popular Drag Reducing Agents (DRAs) space. They are building the infrastructure
to mass produce and distribute DRAs and should be able to capitalize on this largely
untapped market, realizing hefty returns on their top and bottom line. Additionally,
their constant focus on environmentally friendly products positions them to
benefit in today’s increasingly conscious social environment. This aspect of
the company is especially exciting to me considering the consistent emphasis we
put on ESG at Marquette. I believe our
position in this company is secure and that additional returns will be
materialized.
Source:
FactSet
