Monday, August 24, 2009

Ashland (NYSE:ASH): Upgraded to Buy from Hold at Keybanc; $53 price target established

My favourite call today comes from Keybanc Capital Markets.

They are upgrading Ashland (NYSE:ASH) to Buy from Hold and are establishing a $53 price target given improved confidence that Valvoline can keep rolling on higher profitability, cost savings initiatives are ahead of schedule and the Hercules franchises have good room for earnings growth. While the stock has had a strong run since March 2009, they believe it is still attractive trading at an estimated FY10 EV/EBITDA multiple of 4.5x. Firm's price target is based on an estimated FY10 EV/EBITDA multiple of 6.0x.

- 2010 EPS Estimate Increased: Keybanc is raising their FY10 EPS estimate by $0.85 to $3.25 vs. their estimate of $3.00 for FY09. The year-over-year improvement looks for very modest volume growth, improved costs and flattish earnings for Valvoline.

- Valvoline – Sustainable: The majority of the earnings increase noted above comes from increased confidence that the improved profitability throughout the motor oil chain is here to stay. Firm notes they have seen similar highly consolidated industry structure maintain profitability via more rational pricing over the last few years. Valvoline represents around 50% of Keybanc's earnings forecast for 2010. They believe gross margins can be sustained at the low 30% level vs. the low 20% level.

- Functional Ingredients (Aqualon): Keybanc sees 15% growth in operating income in FY10 vs. FY09, primarily due to cost savings and new products wins. With a good recovery in demand, they should see operating margins returning to the mid-teens range vs. an estimated 9% in FY09. They have seen strong margin expansion also from the additives players such as The Lubrizol Corporation (LZ-NYSE) and NewMarket Corporation (NEU-NYSE)

- Water Technologies – On Stable Ground: They believe ASH now has the right platform to compete in the water treatment market. Firm sees the potential for operating margins to improve to mid single digits in FY10 and high single digits longer term as its growth initiatives take hold.

- Attractive Earnings Potential: Given improved demand longer term, ASH is highly leveraged to an economic recovery where they see normalized EPS around the $4.00 level.

- Room for Multiple Expansion: Despite a strong run in the stock, ASH continues to trade at a good discount to the specialty chemical sector. Given the potential for sustained profitability in Valvoline over the next two quarters and improved profitability in Hercules, the firm believes a higher multiple is warranted

Notablecalls: As many of you have noticed, I'm quite a fan of Keybanc's Specialty Chemicals team. The call, while admittedly late is still a good one and will generate buy interest.

- The whopping $53 price target offers close to 70% upside.

- The chart looks like it wants to run several more points before stopping for a breather.

- ASH has always been rumored to be a t/o candidate

All in all, I think this one has potential to be a $38+ stock today.

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