Can Hercules Regain Its Strength?


Can Hercules Regain Its Strength?

This specialty chemicals company shows signs of a turnaround after years of fighting legal battles and running up big debts.

Hercules Inc. may be staging a comeback.

Created in 1912 as a spin-off of DuPont, Hercules was basically a sound specialty chemicals company. But in the 1990s, shares of the Wilmington, Del.-based business took a beating. The stock (symbol HPC) price peaked in 1996 at $66.30 but fell 90% over the next five years as Hercules was hit by a barrage of legal woes, including asbestos litigation, environmental claims, an underfunded pension and IRS audit.

However, the company is turning around thanks to Craig Rogerson, who became chief executive in 2003, says George Putnam, publisher of the Turnaround Letter. Putnam is a lawyer by training, a background that's invaluable for assessing the risks in many turnaround cases. For his investment newsletter, he looks for bombed-out stocks with little downside risk but the potential for dramatic gains when the market recognizes improving company fundamentals. And Hercules is one of his current picks.

Hercules has made good progress on the legal front and has moved rapidly to clean up its balance sheet by selling non-core assets. It's even enjoying a $240 million tax refund.


It turns out that Hercules is in some good, growing businesses. It's the global leader in the market for paper and pulp chemicals and supplies specialty chemicals to industries such as water treatment, cosmetics, pharmaceuticals and paints. Sales at home are a bit sluggish, but revenues in Europe, Asia and Latin America, where it books more than half of its business, are expanding by more than 10% a year.

Cash flow is growing nicely, which is allowing Hercules to pay down its debt, which has shrunk from $3 billion in 2001 to less than $1 billion today. In July 2007, management announced that it will start paying a nickel-a-share dividend in the third quarter, and the board authorized a plan to repurchase up to $200 million of company stock (Hercules' market capitalization is $2.4 billion). Both moves are signs of management confidence in the business.

Wall Street analysts estimate that Hercules will earn $1.45 a share in 2007 and $1.75 next year. The stock closed on September 7 at $20.15, down 4.4%, giving Hercules a modest price-earnings ratio of 14, based on this year's projected earnings. Putnam, who notes that Hercules' valuation is well below that of industry peers, recommends purchase at up to $30 a share.