Innospec Inc.: High-octane performance
Lead in water is bad news. Lead in gasoline can be the stuff of which successful investments are made, at least in the short term.
Innospec Inc. (Nasdaq:IOSP) is a fuel treatment company that produces lead-based additives used by refiners to increase the octane rating of gasoline. It has three distinct business segments: fuel specialties, active chemicals and octane additives. Its fuel specialties business works to create additives that have the ability to improve fuel efficiency, enhance engine performance and reduce emissions. The active chemicals segment focuses on the household detergent and personal-care markets, and the octane additives segment works to make gasoline burn more efficiently by boosting octane levels.
In 2007, fuel specialties accounted for 62.2% of Innospec’s net sales. Active chemicals made up 22.2% of net sales and octane additives comprised the remaining 15.6%. Although its octane additives business is profitable, the segment has been experiencing declining demand and will likely cease to exist in the next several years. The reason for this trend is that Innospec’s octane-additives business comprises sales of tetra ethyl lead (TEL) for use in automotive gasoline. Global use of TEL has been on the decline since the U.S. enacted the Clean Air Act in the early 1970s and other countries have followed suit in exiting the leaded gasoline market.
The company has anticipated the decline and has done an excellent job of growing its fuel specialties and active chemicals segments to compensate for the expected drop-off. For Innospec’s fourth quarter ended Dec. 31, 2007, the company reported 16% year-over-year net sales growth from its fuel additives business and an 8% increase from its active chemicals segment.
United Kingdom-based Innospec became an independent company in 1998 when it was spun off from Chemtura Corporation (NYSE:CEM). Initially it was known as Octel Corp. until it changed its name in January 2006; two months later, the company transferred its stock listing from the New York Stock Exchange to the Nasdaq.
The company has a market cap of $532 million and has seen its stock price appreciate more than 200% over the past five years. In November, JPMorgan Chase & Co. (NYSE:JPM) analyst Jeffery Zekauskas wrote in a research report, “Innospec could represent an attractive acquisition possibility for larger fuel-additive companies.”
As a whole, the company checked in with a strong Q4 quarter. Total revenues for the quarter ended Feb. 8, 2008, were $172.7 million; a 19% increase over the year-ago quarter figure of $144.7 million. EBITDA for the fourth quarter increased by 40% to $27.3 million versus $19.5 million in the prior year’s quarter. Earnings per diluted share for Innospec’s full-year results climbed to $1.19 from $0.45 in 2006.
These strong results led Zekauskas to raise his projection for full-year 2008 EPS to $1.65 from $1.53. “The stock appears inexpensive, trading at 11.5 times 2008 EPS versus 14.3 times for the peer group,” he wrote in a research report on Feb. 11.
It will be interesting to see how the market responds to Innospec’s Q1 results which are likely to be released in the next few weeks. On Feb. 8, Zekauskas had an “overweight” rating on the stock while it was trading around $19 per share. Shares have since moved in a positive direction as Innospec closed at $22.50 on Monday, representing a 30.7% discount to the stock’s 52-week high of $32.45 reached this past July. The stock’s 52-week low is $13.40.
Current price levels have also likely played a role in share repurchases by Innospec. In 2007, the company repurchased 752,000 shares, or just over 3%, of outstanding common shares. Not only is this a positive indicator for current shareholders, but the trend is likely to continue. Just last month the company’s board of director’s announced that Innospec is now authorized to repurchase an additional $8 million of common stock.
Aside from looking to grow the company organically, management has its eyes open for potential acquisitions that could also serve as a means for future expansion. Taking the mergers and acquisitions route to growing the business could pay big dividends to current shareholders, but it could also be inherently risky.
So far Innospec has proven to be an ideal example of an up-and-coming business adapting to changing global trends. There will continue to be hurdles in the quarters ahead, but if past history is of any indicator, it would not be at all surprising to see this company continue to deliver high-octane results.
