Georgia Gulf upgraded to "buy" on improved caustic pricing
Georgia Gulf Corp. (NYSE: GGC), a major North American producer of the commodity plastic PVC, was upgraded to a “buy” rating from “neutral” by UBS based on an improved outlook for caustic pricing and the stock’s implied excess return of 26% versus the bank’s revised target price of $17.
UBS analyst Gregg Goodnight says the chlor-alkali market continues to show unexpected strength. According to Goodnight, in 2007, United States caustic exports are up 13% on a year-to-date basis, and should continue to remain firm in 2008.
For 2007, Goodnight said caustic soda has shown strength, which has been illustrated through three consecutive successful quarterly price increases totaling $110 per thousand short tons (ST). Goodnight said additionally, another increase of $30 per ST has been proposed for the fourth quarter and he said he believes that at least a portion of this increase will be implemented due to continuing firm demand and low inventories.
Operating rates for chlor-alkali producers for July and August were 97% and 96% of capacity, respectively, according to Goodnight, and overall demand growth has been about 1%.
While there has been a modest increase in demand, according to Goodnight, supply has declined and operating rates for North America are higher. Dow’s shutdown of its Ft. Saskatchewan chlor-alkali plant in October 2006 single-handedly trimmed 3% of North American capacity.
Goodnight said he’s expecting continuing poor plastic PVC volumes and low operating rates compared to 2006 due in large part to the U.S. housing construction slowdown and other construction activities. However, the analyst points out that the lower PVC demand should bode well for caustic pricing in 2008, as lower PVC demand, which reduces chlorine operating rates, will decrease the availability of co-produced caustic and thus boost its price.
On account of an optimistic outlook for caustic pricing, Goodnight is raising his 2008 and 2009 estimates. The analyst raised his 2008 EPS estimate to $0.75 from breakeven and raised his 2009 EPS estimate to $1.50 from $1.25. Ten analysts polled by Thomson Financial are on average forecasting EPS of $0.21 per share.
Georgia Gulf is expected to report third quarter earnings on Nov. 1.
A chlor-alkali process is any electrolytic process which produces chlorine or a related oxidizer, such as bleaching powder, and an alkaline salt such as sodium hydroxide or sodium carbonate.
Shares of Georgia Gulf (GGC) rose 3.20%, or $0.41, to $13.21 in afternoon trading. Shares of Georgia Gulf have been trading in the range of $12.14 to $28.65 for the past 52 weeks.
