There's a simple chart that Bob Patterson points to when he
wants to explain the transformation his company has gone through
over the past several years.
Patterson is CEO ofPolyOne (
), a maker of polymer materials and other products for the
plastics industry, which beat quarterly earnings views on
A decade ago, the company focused primarily on low-margin,
commodity-type products. PolyOne was profitable, but growth was
slow, and its stock price hovered in the single digits.
But after a management shakeup that included hiring the
now-retired Stephen Newlin as CEO, PolyOne set about turning
itself into a designer and manufacturer of higher-margin, more
complex specialty products.
This shift is demonstrated in a chart showing the trajectory
of specialty products as a percentage of PolyOne's operating
income. In 2005, specialty products made up 2% of operating
income. That ratio now sits at about 64%. The projection next
year is that it could rise as high as 75%.
'Engine For Growth'
"Innovation is at the heart of our transformation, and so is
product-mix improvement," Patterson told IBD. "The specialty
platform is our engine for growth. We think it could represent
80% to 90% of our earnings profile by 2020."
That platform covers a wide range of uses and end markets,
ranging from construction and industrial to health care and
One of PolyOne's newer innovations is an authentication
technology, called Percept, that is designed to protect
everything from branded apparel to glucose testing equipment from
Another recent innovation is a metal replacement technology
whose applications include lead-free radiation shielding, such as
for CT scans.
Patterson also points to a broad platform of products, based
on soft-touch materials, called thermoplastic elastomers, or
TPEs. These materials are used in consumer products such as
soft-touch grips for razor handles and toothbrushes.
"We have great exposure in consumer markets, but we are also
focusing on advancing applications in the health care space for
TPEs," Patterson said.
One of those applications is for arthritis medications
packaging, he says. "With TPEs, you can make a soft-grip material
that makes it easier to use for elderly patients. It is also
being used to help facilitate grips on medical devices used by
physicians during surgery, where gripping is important. Soft
touch is used to facilitate that."
PolyOne's product ideas come from its own research and
development team as well as from customers.
"They are working to solve the customer's needs -- to try and
determine the right color for a product, the right flexibility,
the right functionality. That's a key to their success: working
with customers to solve those challenges," said Elliott Schlang,
managing director of Great Lakes Review, an institutional
research boutique in Cleveland.
Demand for these types of products helped PolyOne run off four
straight quarters of 25%-or-better sales growth before logging a
3% decline -- missing consensus estimates -- for its 2014 second
quarter, which the company reported after Monday's close.
In a statement, PolyOne said that the Q2 revenue dip was
partly due to the company's decision to "exit certain
unprofitable products" associated with last year's buyout of
Spartech, a maker of bulletproof barriers and aircraft cabin
PolyOne's bottom-line performance was much better during the
quarter. The company posted Q2 earnings of 51 cents a share, up
38% from the prior year and a penny ahead of views.
Analysts polled by Thomson Reuters expect full-year EPS gains
of 37% in 2014 and 36% in 2015.
"The driving force behind their growth, by far, is the fact
that this is a company that has done a very good job transforming
itself from a commodities chemical company into a specialty
chemicals company," Schlang told IBD.
It's one thing for a company to aspire to this kind of
makeover, Schlang says. It's another to actually pull it off
while still putting up solid financial results.
PolyOne's ability to do so is a credit to its executive team,
says Schlang, who owns shares of PolyOne.
"Behind the transformation has been a dramatic management
change, with Newlin changing the whole direction of company," he
Newlin took over as PolyOne CEO in February 2006 after
previous stints atEcolab (
) and Nalco Chemical. He spent the next eight years helping
PolyOne establish itself as a leading supplier of specialty
In May, Newlin stepped down as CEO, but he remains executive
chairman of the PolyOne board of directors.
Patterson, Newlin's replacement as CEO, has been with PolyOne
since 2008. He previously served as chief financial officer,
executive vice president and chief operating officer.
Schlang calls Patterson "extremely bright, articulate and well
"In my opinion, he and Newlin are two peas out of same pod,
and I look at that as a continuation of the transformation of the
company," Schlang said.
For his part, Patterson, 41, doesn't expect to make any
radical changes as PolyOne's top executive.
"As I stepped into this role, I acknowledged that we have
fantastic momentum," he said. "In that regard, certainly things
don't need to change in terms of our strategy and our emphasis on
PolyOne is part of IBD's Chemicals-Plastics group, which ranks
No. 77 among 197 industries that IBD tracks. Another stock in the
group that makes specialty products isA. Schulman (
), which belongs to IBD's Chemicals-Specialty group, has also
been listed as a player in the specialty plastics market.