Kraton Performance Polymers (NYSE:KRA): Raise Estimates on Continued Pricing Power; Raise Target to $67/share - Oppenheimer

Oppenheimer is out very positive on Kraton Performance Polymers (NYSE:KRA) raising their price target to a whopping $67 (prev. $50) while reiterating Outperform rating on the name. The price target lends close to 80% upside

The main reason for the target/est raise: Kraton's ability to raise prices. According to Oppenheimer, KRA has continued to raise prices this month, with 41 increases in the last 18 months.

There have been several positive fundamental developments since their last report: 1) KRA has announced three new rounds of price increases, 2) butadiene prices have risen by a record $0.17, or 16%, to $1.21, 3) potent HSBC competitor Kuraray appears hobbled by the earthquake and 4) private equity sold its remaining 10MM shares at $37.75, removing an overhang.

- In their recent meeting, KRA appeared confident in its ability to manage the ongoing surge in BD prices, which in the past for various financial and economic reasons have bolstered earnings. Aside from potent FIFO boosts, the more tangible benefit is to create a nice umbrella for KRA's smart-pricing strategy, while constraining Asian price competition.

On the Asian side, the tragic earthquake has had minimal impact on KRA (20kt), but hobbled Kuraray, a thorny competitor, as the Mitsubishi site appears down at least to the summer. Kuraray's customers are in the process of evaluating alternate suppliers and KRA is a logical fit. KRA is likely to pursue longer term contracts.

Opco raises '11E and '12E EPS by 2-4% to $4.21 and $5.13, respectively. While their numbers are 10% and 21% above consensus, they assume modest 6-7% volume growth, 5-9% pricing and minimal 50-100bps margin expansion to 17.6% by 2012, below KRA's long-term target in the "high-teens."

They see gains for KRA driven by strong EPS growth, as its niche rubber products are in the early stages of significant substitution opportunities vs. high natural rubber and less desirable PVC. KRA appears undervalued at 7.4x '12E P/E, while volumes have historically grown 2x GDP through substitution of less recyclable or efficacious materials

Notablecalls: Kraton (KRA) isn't exactly a household name, but it's a leading producer of styrenic block copolymers (SBCs). SBCs are a derivative of styrene butadiene synthetic rubber (SBR) that the U.S. Government developed in the 1940s.

Kraton is poised to benefit from the migration away from PVC plastics that are not recyclable and often require potentially unsafe additives. These products range from medical packaging and tubing to wire and cable. Companies such as Apple (NASDAQ: AAPL) that aim to make their products entirely from recyclable materials.

Kraton’s three primary raw materials are styrene, butadiene and isoprene. Kraton dominates its piece of the $4-$5 billion, 1,500-Kiloton SBC market.

The price of butadiene has been soaring but Kraton has done a very good job passing the costs on to customers. Opco is raising their #'s but even then the company is trading just 7-8X EPS.

The new $67 price target lends 70-80% upside (more if #'s keep raising). This is exactly what people are looking for in this market. Will likely create significant buy interest. Type of thing that is prone to make 7-10% moves intraday.