Nalco: Chemical Reaction
The ability to raise prices aggressively should lead to fatter earnings for this specialized chemical maker, one analyst says.
After experiencing some of the worst that capitalism has to offer, Nalco (symbol NLC) is finally ready to thrive, says Citigroup analyst P.J. Juvekar, who just upgraded the stock to a "buy." Nalco, the largest provider of water treatment and other chemical services that improve industrial processing, was taken private in 2003 and went public again in 2004.
The stock has gone nowhere since then for several good reasons. Nalco has $3.25 billion in debt -- giving it a debt-to-equity ratio of nearly five. But not much of that debt matures until 2010, and Nalco's cash flow should enable it to meet its interest obligations, Juvekar says. Another problem: The private equity investors who took the company private still own a big chunk of the stock. Juvekar thinks few will hang on for the long term, and their selling will depress the stock's price. Finally, Nalco has a pension plan that's $434 million underfunded.
But Nalco runs great businesses. As a maker of specialized chemicals, it uses a lot of energy, but it's increasingly able to pass along higher energy costs -- and increase prices even further, Juvekar says. A huge team of scientists -- the company owns more than 2,000 patents -- makes Nalco's services invaluable. More than two-thirds of the companies in Standard & Poor's 500-stock index do business with Nalco. What's more, those clients stay put: Fifteen of Nalco's biggest 20 clients have been with the company for more than ten years.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.

Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The reason: Whether it's chemicals that help control corrosion in water pipes or that make paper plants more efficient, Nalco saves its clients big bucks. Generally, Nalco employees are stationed at its client's plants, but Juvekar says a new service enables Nalco to monitor plants -- and adjust chemical mixes -- remotely. He also believes that Nalco will benefit from plans to sell more of its services to smaller companies. For all these reasons, he thinks Nalco will be able to raise prices far more aggressively than do other analysts. Higher prices would mean higher profit margins and fatter earnings.
Based on a share price of $18, Nalco sells for 27 times Juvekar's 2006 earnings estimate of 67 cents per share. Other analysts are forecasting about the same earnings for this year, according to Thomson First Call. But Juvekar expects earnings to jump to $1.28 per share next year, while the average analyst foresees earnings of just 95 cents. Juvekar bases his estimate on computer modeling done after recent conversations with Nalco's chief executive, Bill Joyce, and its chief operating officer, Bill Roe. Nalco trades at just 14 times Juvekar's '07 profit forecast. Juvekar estimates that Nalco's earnings will grow 10% annually over the next five years.
--Steven Goldberg
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
-
Claiming the Standard Deduction? Here Are Five Tax Breaks for Retirement in 2025
Tax Tips If you’re retired and filing taxes, these five tax credits and deductions could provide thousands in relief (if you qualify).
-
QUIZ: Test Your Retirement IQ
Quiz Are you smarter than…everyone else? Test your retirement smarts with this quiz.
-
If You'd Put $1,000 Into Bank of America Stock 20 Years Ago, Here's What You'd Have Today
Bank of America stock has been a massive buy-and-hold bust.
-
If You'd Put $1,000 Into Oracle Stock 20 Years Ago, Here's What You'd Have Today
ORCL Oracle stock has been an outstanding buy-and-hold bet for decades.
-
How to Invest for Rising Data Integrity Risk
Amid a broad assault on venerable institutions, President Trump has targeted agencies responsible for data critical to markets. How should investors respond?
-
If You'd Put $1,000 Into Sherwin-Williams Stock 20 Years Ago, Here's What You'd Have Today
Sherwin-Williams stock has clobbered the broader market by a wide margin for a long time.
-
If You'd Put $1,000 Into UnitedHealth Group Stock 20 Years Ago, Here's What You'd Have Today
UNH stock was a massive market beater for ages — until it wasn't.
-
What Tariffs Mean for Your Sector Exposure
New, higher and changing tariffs will ripple through the economy and into share prices for many quarters to come.
-
How to Invest for Fall Rate Cuts by the Fed
The probability the Fed cuts interest rates by 25 basis points in October is now greater than 90%.
-
Are Buffett and Berkshire About to Bail on Kraft Heinz Stock?
Warren Buffett and Berkshire Hathaway own a lot of Kraft Heinz stock, so what happens when they decide to sell KHC?