NewMarket Sees Growth Potential In Fuel Additives

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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 value.

Such is the case withNewMarket ( NEU ), 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 oil additives.

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 call.

Stock Buyback

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 ( XOM ) and Oronite, owned byChevron ( CVX ).

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 Pacific.

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 Asia.

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%.

Cash Flow

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 several years.

"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 Gottwald.

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.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: CVX , NEU , XOM

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