Wednesday, December 17, 2008

OM Group (NYSE:OMG): Downgraded to Underweight, $15 tgt - KeyBanc

Keybanc is out with a yet another major Specialty Chemicals call downgrading OM Group (NYSE:OMG) to Underweight from Hold with a $15 price tgt.

Firm notes that during 4Q08, cobalt prices moved from $29/lb in October to $16/lb in November to about $11/lb in December, making the 4Q08 average price $17/lb. They had previously based their 4Q08 EPS estimate of $0.28 on cobalt at $23/lb. Given the precipitous drop, they now estimate 4Q08 EPS for OM Group at a loss of $0.18, bringing revised 2008 EPS estimate to $4.60. Prior 2008 EPS estimate was $5.05

Using a cobalt price of $11/lb (vs. $21/lb previously) for 2009, Keybanc's EPS estimate is cut from $2.50 to $0.80. They again caution that cobalt prices are highly volatile with swings that can be large and swift; therefore, the new 2009 EPS estimate of $0.80 should be viewed with a high degree of skepticism and with the expectation that frequent EPS revisions are possible as cobalt prices change.

A wild card in their 4Q08 estimate is the amount – if any – OMG may write down its inventory as it applies the "lower of cost or market" criteria to its inventory valuation. Firm notes they have estimated a $7.0 million (equal to $0.15 per share) mark-to-market adjustment in the 4Q, but have no firm basis for making a specific estimate.

They see no catalyst to drive the shares higher in the near term. With losses expected in 4Q08 and 1Q09 and very low EPS expected in 2009, they see more downside risk than upside potential at this time.

Notablecalls: I'm starting to like Mr. Saul Ludwig, KeyBanc's Speciality Chemicals analyst.

Assuming he is right about 2009 EPS OMG shares are trading at a whopping 27-28x P/E.

Remember what happened to Arch Chemicals (NYSE:ARJ) few weeks back when Ludwig was out with a pretty much similar call? ARJ got whacked!

OMG is going to suffer the same fate, I suspect. I see the stock going sub $20, probably as soon as today. This is a monster call.

1 comment:

HappyScrappy said...

yo, OMG sells cobalt and uses it to produce specialty chemicals/catalysts. the change in the price of cobalt and a huge impact on eps but the effect of free cash flow is not as significant. it has to do with how they account for their cobalt inventory. so on the other side of a cobalt price increase they write up all their inventory so they earn like $7 bucks a share....did you look at the balance sheet on this company?