Cash is king, as the saying goes. So when you're a company
that is flush with cash, you're typically in a strong position
regarding the options you have for your business and shareholder
Such is the case withNewMarket (
), a maker of chemical additives that improve the performance of
petroleum products. Its products include diesel cetane improvers,
tetraethyl lead, performance fuels, refinery chemicals and engine
The Richmond, Va.-based firm has been throwing off cash hand
over fist, despite being a part of a slow-growth industry. It
recently announced a $25 per share special dividend. That's in
addition to a sixfold increase in its regular quarterly dividend
rate over the past five years.
"This special dividend provides an immediate return for
shareholders in a low tax rate, efficient environment," said CEO
Thomas Gottwald during the third-quarter earnings conference
During that time, the company also bought back 4 million, or
23%, of its outstanding shares and made two successful
acquisitions of petroleum additives businesses.
"They throw off an amazing amount of cash," said Ivan Marcuse,
analyst at KeyBanc Capital Markets. "And NewMarket has been very
aggressive in using cash that is up and beyond their growth needs
and general investment needs to return it to shareholders.
"It is a low-growth industry, but the earnings have been
growing at a very strong rate as they are getting better margin
per ton of their product because of technology increases and
they've been investing in their core business and not really
going outside of it."
The petroleum additives industry grows at a 1%-to-3% rate
annually. NewMarket is the smallest among four major players in
the industry. Its competitors include Lubrizol, now part
ofBerkshire Hathaway (BRKB), Infineum, a joint venture
betweenRoyal Dutch Shell (RDSA),Exxon Mobil (
) and Oronite, owned byChevron (
Combined, the four players represent more than 90% of global
market share. NewMarket believes it will be able to grow slightly
better than the overall industry in the long run.
One of the key strengths of the petroleum additives industry
is that it's very consolidated and all players are rational in
regards to pricing, explains Marcuse.
"If material costs in the industry are going up, everyone
tends to announce price increases and vice versa," he said. "So
there's not a lot of jacking for market share."
The way the industry competes is mostly via improved
technologies and service to its clients.
"You're seeing R&D dollars increase at a rate well above
inflation. For every new engine that comes out, there's new
regulations now on how efficient it needs to run, the emissions
it needs to leave. Really, it's the additives that bring those
qualities," he said.
That's why companies like NewMarket constantly invest in new
products, and this drives higher R&D spending. In addition,
barriers to entry are very steep.
"For a new competitor to get in, it would take significant
capital outlay to build a plant. And then you would have to get
up to speed on the technology, which continues to increase every
single year because of all the emission standards that are
arising for engines, fuel efficiency, etc. And then you would
have to go and convince the customers to switch."
North America and Europe are mature markets, having reached a
point of saturation. In order to grow, NewMarket is pursuing
markets where it is underrepresented, such as the Asia
The company invested in a manufacturing facility in Singapore
a few years ago. It is now building a new detergents plant, due
to be completed by 2014-15.
Marcuse believes that NewMarket will be able to outperform the
industry over the next couple of years if they are successful in
growing their business a little bit more than it is right now in
As more miles are driven in countries such as China or India,
and the number of cars per capita increases, demand for lubricant
products and as a result for lubricant additives goes up.
The economic expansion in Asia is one of the key determinants
to NewMarket's growth. Marcuse estimates that the company could
generate as much as 30% of its sales from Asia, vs. the current
15% to 20%.
The company also said during their call that it further
expects its cash flow to significantly outpace its internal
growth needs, even with stepped-up capital spending over the next
"Our plans call for increased investment in the business to
support our customers worldwide and to capture growth," said
Gottwald during the call.
"We continue to focus our acquisition strategy on the
petroleum additives market. And since there are limited
opportunities here, we're going to be patient, find the right
acquisition and not buy a business we know nothing about," added
NewMarket has plans for more reinvestment into the business
over the next five years compared to the prior five years, he
mentioned. The company expects to achieve this via creating value
to their customers. More specifically, it intends to provide its
customers with products that could help them grow their business
and lower their cost.
"We're not a company that takes a shotgun approach to our
growth . .. . We see a lot of opportunities in our market place,
but we're taking a measured, systematic approach to achieving
that growth," Gottwald said.