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I haven't made too many stock picks on this blog the last week or two. It isn't that there weren't any stocks to write about, just that I was busy with other things. I have several hats that I wear, and with the 2006 elections consuming my interest, I was spending time reading, writing, and discussing politics. But that is an entirely different subject. For those of you who stopped by and found nothing new to read about, I apologize. But I am glad that some of you have continued to drop by and find out about what I have been writing. If you are new to the blog, welcome! I hope that you will be able to wade through the many entries that I have created and that you will be able to gain another perspective, perhaps learn a new way to look at stocks. If so, then I shall be glad to know that I have been successful in sharing my own perspective with all of you!
As regular readers probably realize, I like to look for stocks by examining the stocks that are showing strong price momentum on the day that I write them up. Today, while looking through the list of top % gainers on the NYSE, I came across Rohm & Haas (ROH) which as I write is trading at $51.85, up $1.89 or 3.78% on the day. I do not own any shares of ROH nor do I own any options on this stock. Let me go through the factors that led me to pick this stock for the blog.
1. What exactly does this stock do?
To get a handle on this question, I routinely refer to Yahoo Finance, and looking at the Yahoo "Profile" on Rohm & Haas, we can see that this company
"...provides specialty materials for the personal care, grocery, home, and construction markets in the United States. It operates in six segments: Coatings, Performance Chemicals, Monomers, Electronic Materials, Adhesives and Sealants, and Salt."
2. How did they do in the latest quarter?
If you are a regular reader here, you will know that I am looking for increasing revenue and earnings. If possible, I appreciate reading that the company is raising guidance. If a company can get all of that, and maybe even exceed expectations, I call this a "trifecta" or "trifecta-plus" if everything falls into line!
On October 19, 2006, ROH reported 3rd quarter 2006 results. For the quarter ended September 30, 2006, sales came in at $2.07 billion, up 7% from $1.93 billion in the same quarter a year earlier. Diluted earnings per share grew 18% to $.86/share, up from $.73/share last year. Since expectations are so important in determining the market's reaction to news, it was nice to see that Rohm & Haas topped estimates of $.83/share and met sales expectations. Guidance, however, was not raised above analysts' expectations of $3.41/share, as the company confirmed guidance for 2006 of $3.40 to $3.45/share.
3 . How about longer-term results?
Looking at the Morningstar.com "5-Yr Restated" financials on ROH, we find that Rohm & Haas has been steadily increasing its revenue from $5.67 billion in 2001 to $7.99 billion in 2005 and $8.16 billion in the trailing twelve months (TTM).
Earnings have also been steadily increasing from a loss of $(.32)/share in 2001 to $2.85/share in 2005 and $3.02/share in the TTM. A nice plus in this stock is that the company does pay a dividend and has been increasing its dividend each year. The company paid $.80/share in 2001, had increased it to $1.12/share in 2005 and has paid $1.20/share in the TTM. Also, as I like to observe, the number of shares outstanding has been stable, and actually dropped slightly in the past 12 months. The company is noted to have 222 million shares outstanding in 2003, stayed at 222 million in 2005, and dropped to 221 million in the trailing twelve months.
Free cash flow has been positive and appear to be increasing recently. The company had $609 million in free cash flow in 2003, $614 million in 2005 and $702 million in the TTM.
The balance sheet is adequate, although I have reviewed companies with better 'current ratios'. The company is noted to have $492 million in cash and $2,814 million in other current assets. This easily covers the $1.9 million in current liabilities, yielding a current ratio of 1.73. However, the company does have an additional $3,802 million in long-term liabilities. With the growing and significant free cash flow, this debt does not appear to be a problem for this company.
4. How about some valuation numbers?
Checking the Yahoo "Key Statistics" on Rohm & Haas, we find that this company is a large cap stock with a market capitalization of $11.3 billion. The trailing p/e is a very reasonable (imho) 16.62, with a forward p/e (fye 31-Dec-07) of 14.48 The PEG is reported at 1.46, with 1.0 to 1.5 considered a fair valuation.
Looking at the Fidelity.com eresearch website, we can see that ROH is in the "Chemicals-Major Diversified" industrial group. Within this group, the companies with the highest Price/Sales ratios start with Air Products (APD) at 1.8, Rohm & Haas (ROH) follows at 1.3, Sherwin-Williams (SHW) follows at 1.1, Dow Chemical (DOW) is next at 0.8, and Ashland (ASH) is at the bottom of the list, the cheapest in valuation, with a Price/Sales ratio of 0.5.
Looking at profitability, using Return on Equity (ROE) as a guide, we find that ROH is near the bottom of the list with Sherwin-Williams leading at 31.1%, Dow Chemical at 23.8%, Rohm & Haas at 17.8%, Air Products at 16% and Ashland at 8.6%. Thus, in this measure, ROH does a bit better in terms of performance.
Returning to Yahoo, we find that there are 218.43 million shares outstanding but only 77.54 million shares that float. There are 1.79 million shares out short as of 10/10/06, but since the average daily volume of shares traded is nearly a million shares each day, this large amount ends up representing only 1.2% of the float or only 2 trading days of volume. This is not very significant to me due to my idiosyncratic 3 day rule for significance in short interest.
As I have noted elsewhere, the company does pay a significant dividend currently with $1.32 anticipated in the next 12 months yielding 2.60%. The last stock split was a 3:1 split back in September, 1998.
5. What does the chart look like?
Generally, I utilize "Point & Figure" charts for this analysis. Looking at the "Point & Figure" chart on Rohm & Haas from StockCharts.com, we can see what appears a very steady saw-tooth increase in the stock price from $23/share in September, 2001, to a recent peak of $52 in October, 2006. The stock appears to be fairly strong with higher highs and higher lows for the last several years.
6. Summary: What do I think about this stock?
First of all, let's review briefly some of the findings that I noted above. The company is making a nice move higher today along with much of the market. They had a very nice quarter with increased revenue and increased earnings and beat earnings expectations. Guidance was in line with analysts.
They have had a steady improvement in both revenue and earnings the past five years. In addition, they pay a nice dividend and have been increasing it regularly each year. They have kept their shares outstanding stable and recently have even reduced their shares slightly. Free cash flow is solid and improving and the balance sheet appears solid.
Valuation-wise, the p/e, and PEG are reasonable. Price/sales and ROE are a bit less than I would like. And finally, the chart looks solid. This is what I would describe as a solid large cap growth stock. Fairly conservative, yet it fits the criteria that I use to evaluate companies. If I were in the market to be buying a stock, this is the kind of company I would like in my portfolio.
Thank you so much for visiting and reading my entries! I hope this is helpful for you, I know that for me, evaluating and reading about stocks continues to increase my own understanding of the many ways of evaluating and understanding investments in the stock market. If you have any comments or questions, please feel free to email me at email@example.com and be sure to visit my Stock Picks Podcast Site where I discuss many of the same stocks and subjects I write about on the blog.