Bear of the Day: Chemtura (CHMT)
Earnings estimates have fallen sharply for Chemtura Corporation (CHMT) after the company delivered disappointing third quarter results on October 28. This drove the stock to a Zacks Rank #5 (Strong Sell).
Although shares of Chemtura have taken it on the chin so far this year, it still does not look like a value with a forward P/E of 20x and an EV/EBITDA multiple of 11.
Chemtura Corporation manufactures and markets specialty chemicals that serve various industries, including transportation, building & construction, and energy & electronics. The majority of its chemical products are sold to industrial manufacturers for use as additives, ingredients or intermediates that add value to their end products.
Third Quarter Results
Chemtura reported disappointing Q3 results on October 28. Adjusted earnings per share came in at 20 cents, missing the Zacks Consensus Estimate of 29 cents.
Net sales declined 2% year-over-year to $558 million, below the consensus of $574 million. Management stated that it experienced weak demand and excess capacity in some of its segments.
Meanwhile, adjusted operating income fell 3% to $32 million.
Estimates Plummeting
In the Q3 press release, management stated that in order to meet its expected performance improvement in 2015, it is looking to cut manufacturing costs by approximately $50 million. The company also announced on November 3 that it had sold its agrochemicals business, Chemtura AgroSolutions, for approximately $1 billion as it seeks to become a pure-play industrial specialty chemicals business.
Nonetheless, analysts have revised their earnings estimates significantly lower for both this year and next year. The negative revisions were strong enough to send Chemtura to a Zacks Rank #5 (Strong Sell), placing in the bottom 5% of all companies that Zacks ranks based on earnings momentum.
The 2014 Zacks Consensus Estimate is now $0.83, down from $1.01 before the report. The 2015 consensus is currently $1.18, down from $1.36 over the same period.
Premium Valuation
Although shares of Chemtura are down significantly so far this year, the valuation picture does not look attractive. The stock trades at more than 20x 12-month forward earnings, well above its 10-year historical median of 13x. And its enterprise value to EBITDA (earnings before interest, taxes, depreciation and amortization) multiple of 11 is also well above its historical median of 6x.
The Bottom Line
With challenging industry fundamentals, declining earnings estimates, and premium valuation, investors should consider avoiding Chemtura for now.
Todd Bunton, CFA is a Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor and Surprise Trader services.
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