Olin Corporation OLN is poised to benefit from its investment in the Information Technology (IT) project, the Lake City U.S. Army contract and its cost control and productivity actions amid headwinds from a weak pricing environment.
Shares of this chemicals maker are down 54.7% over a year, compared with the 43.1% decline of its industry.
Let’s find out why this Zacks Rank #3 (Hold) stock is worth retaining at the moment.
Olin is expected to gain from cost and other benefits from its investment in the IT project. The company, in 2017, started a multiyear project for implementing a new enterprise resource planning, engineering and manufacturing systems. The project, which involves implementation of necessary IT infrastructure, is expected to maximize cost effectiveness, efficiency and control over its global chemical operations by standardizing business processes. The company, at the end of the 2019, converted around 35% of its chemical business users to the new enterprise resource planning systems. It expects the project to substantially complete this year.
Olin also remains committed to improve its cost structure and efficiency. These actions led to a year-over-year reduction in the company’s operating and administrative costs in 2019. The company expects to continue to benefit from its cost control and productivity actions in 2020. It anticipates a reduction in operational and administrative costs this year compared with 2019.
The company, in December 2019, announced its plans to permanently close down a 230,000-ton chlor alkali plant and its Vinylidene Chloride (VDC) production facility, both located in Freeport, TX. It expects these closures to complete before the end of 2020. These actions are expected to reduce the company’s annual operating costs by around $35 million when completed.
The company’s Winchester segment is also expected to benefit from the Lake City U.S. Army ammunition contract. Last year, the Winchester unit was picked by the U.S. Army to manage and operate the Lake City Army Ammunition Plant in Independence, MO. The company expects this multiyear contract to significantly boost annual profitability of the Winchester unit starting 2020.
Weak Pricing a Concern
The company is exposed to a weak product pricing environment. It witnessed continued weakness in caustic soda pricing in the fourth quarter of 2019. Caustic soda prices dropped nearly 24% year over year in the quarter. Lower caustic soda and ethylene dichloride pricing, partly due to weaker demand, contributed to a 22% decline in sales of its Chlor Alkali Products and Vinyls unit in the fourth quarter.
Lower product prices due to demand weakness also hurt revenues in the Epoxy unit in the last reported quarter. The company saw lower epoxy resin pricing in all regions in the quarter. Average global epoxy resin prices tumbled 20% in 2019. Per the company, demand weakness from global automotive, global electrical laminate and industrial coatings markets led to the price decline globally. Olin expects to continue witnessing a challenging pricing environment this year.
Olin Corporation Price and Consensus
Olin Corporation price-consensus-chart | Olin Corporation Quote
Stocks to Consider
Better-ranked stocks worth considering in the basic materials space are Newmont Corporation NEM, NovaGold Resources Inc. NG and Franco-Nevada Corporation FNV.
Newmont has an expected earnings growth rate of 91.7% for 2020. The company’s shares have gained roughly 30% in the past year. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
NovaGold has a projected earnings growth rate of 11.1% for 2020. It currently carries a Zacks Rank #1. The company’s shares have surged roughly 85% in a year.
Franco-Nevada has a projected earnings growth rate of 22% for 2020. The company’s shares have rallied around 38% in a year. It currently has a Zacks Rank #2 (Buy).
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