PolyOne Margins Expand Thanks To Plastics Innovation

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The term "plastics" might not quicken the pulse of tech-happy geeks eagerly awaiting the day their cellphones can sprout wings and fly them to the moon.

But that doesn't mean the plastics industry is stuck back in the 1970s. A number of companies are using 21st century innovation and technology to push the industry into new areas of growth.

One of those companies isPolyOne ( POL ). It makes specialized polymer materials for the plastics industry, everything from PVC (polyvinyl chloride) resins and biodegradable color concentrates to high-density compounds as strong as metal.

Over the past six years, PolyOne has transformed itself from a supplier of low-margin, commodity-type products into an industry leader in innovation, research and development. The strategy has allowed PolyOne to fetch some of the highest margins in the business.

"Every project they take on has much higher margins than those at the average company," said Dmitry Silversteyn, an analyst at Longbow Research. "They've really become an R&D engine."

Chief Executive

He gives much of the credit to Chief Executive Stephen Newlin, who took over the helm at PolyOne in February 2006 after previous stints atEcolab ( ECL ) and Nalco Chemical.

"It took Newlin three or four years to transform the company culture from a commodity mindset to one that focuses on profit margins and R&D," Silversteyn said. "PolyOne has increased its R&D twofold over the past six years, more than doubled its sales and marketing staff and doubled its gross margin."

He cites the company's work with computer makerHewlett-Packard ( HPQ ) as an example of how PolyOne has evolved over the years.

After HP was having problems with a plastic part in one of its printers -- a "low-value product" that had problems moving paper and wore out too quickly, Silversteyn says -- PolyOne developed a much more advanced part that involved a blend of additives and plastic. It ended up fixing the problem.

"It's a small piece of plastic, but in terms of dollar value it's almost equivalent to the entire plastic casing around a printer," Silversteyn said.

In addition to beefing up its R&D, PolyOne also has used buyouts to broaden its product line. The latest acquisition came Oct. 24, when PolyOne announced plans to buySpartech ( SEH ), a maker of bulletproof barriers and aircraft cabin windows.

The deal is valued at $393 million, including $246 million for the acquisition itself as well as the assumption of $142 million in debt.

PolyOne's stock price rose 9% to 18.36 the day the buyout was announced, helped by a better-than-expected Q3 earnings report.

Shares continued to rise over the next several sessions, touching a 13-year high of 20.30 on Nov. 2.

PolyOne said it expects the buyout to add to earnings in the first year. The deal is expected to close in the first quarter of 2013.

In addition to its security and aerospace gear, Spartech makes plastic sheets, specialty film laminates, specialty plastic alloys, color concentrates and blended resin compounds. The company had $1.1 billion in sales last year.

On a conference call to discuss Q3 results and the buyout, CEO Newlin said Spartech resembles PolyOne in the early stages of its own transformation.

"(Spartech has) strong positions in several growth segments, but is underappreciated in the specialty space," Newlin said. "They utilize many technologies that serve specialty markets such as aerospace, security and specialized packaging. They also recognize the importance of leading innovation."

Spartech gets 94% of its revenue from North America. One of PolyOne's priorities is to widen the company's geographic footprint.

"We have a tremendous opportunity to expand all of Spartech's platforms from a predominantly North American focus to other regions of the world," Newlin said. "(We can grow) organically with existing Spartech customers and open new opportunities through prospecting and cross-selling, using the broader and already established global PolyOne network."

PolyOne gets 64% of its revenue from the U.S. Europe accounts for 18%, Canada 9% and Asia 7%. The rest is split between South America and other markets.

New Acquisition

Last year, PolyOne acquired ColorMatrix, a manufacturer of colorants and other additives for plastics. That deal has added about 2 to 3 cents to earnings per share this year.

Financially, PolyOne has produced 12 straight quarters of sales and earnings growth.

The bottom line has grown in double digits all but one quarter over the past three years. But the top line hasn't grown in double digits since the June 2011 quarter, a cause of concern for some.

"People are concerned about volume declines, but part of that is because PolyOne is not willing to deal with customers who don't look at them as a value provider," Silversteyn said. "So there has been some voluntary volume erosion. Plus there's been a volume decline in Europe due to some of the economic problems there."

He expects PolyOne's revenue to grow 4% this year, then rise 37% in 2013 as the Spartech business comes aboard. Revenue growth should ease back to 7% in 2014.

Earnings growth should be much steadier. Analysts polled by Thomson Reuters expect profit to grow 18% this year, 14% in 2013 and 19% in 2014.



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: ECL , HPQ , POL , SEH

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