Arch Chemicals Inc - Growth & Income

Arch Chemicals Inc (ARJ) delivered another solid quarter on healthy sales growth and an expanding gross margin. Earnings per share came in 21% ahead of the Zacks Consensus Estimate as the company recorded its fifth consecutive positive surprise.

Management also raised its guidance for the rest of 2010 due to the strong quarter, prompting analysts to revise their estimates higher. It is a Zacks #2 Rank (Buy) stock.

Solid Quarter

Arch Chemicals reported third quarter results on November 2. Earnings per share was 46 cents, beating the Zacks Consensus Estimate by 8 cents. It was a 12% increase over the same quarter in 2009.

Sales were up 4.3% year-over-year. The Biocides Products division, which accounts for 86% of total sales, saw a modest gain of 2.7%. The Performance Products segment, which makes up the other 14%, increased a solid 14.7% over the same period due to higher pricing and volumes.

Meanwhile, the gross margin improved from 28.3% of sales to 30.1%. This helped drive operating income 7.0% higher in the quarter.

Guidance Raised

The company raised its guidance following the strong third quarter. It now expects to earn between $2.40 to $2.50 per share, up from previous guidance of $2.25 to $2.40.

Analysts have been raising their estimates higher too, as seen in the Price & Consensus chart:

The Zacks Consensus Estimate for 2010 is right in the middle of management's guidance at $2.45. This equates to 28% EPS growth over 2009. The 2011 estimate is currently $2.59, representing 5% annual growth.

Dividend Comparison

Arch Chemicals has a dividend yield of 2.3%, but the company has not raised it in over 10 years.

Compare this to competitor Quaker Chemical (KWR), which has a dividend yield of 2.4%. It has raised its dividend 5 times in the last 10 years. Also, after 10 years of holding its dividend flat, Lubrizol (LZ) began raising it again in 2007. It sports a 1.4% dividend yield. Meanwhile, Hawkins (HWKN) carries a 1.5% yield, but it has raised its dividend at a compound annual rate of 10% since 2000.

Reasonable Valuation

Arch Chemicals appears to be reasonably valued. Shares trade at 14.3x forward earnings, a slight discount to the industry average of 15.0x. Its price to book ratio is 2.0, also a slight discount to the peer average of 2.2.

Arch Chemicals manufactures chemicals for several industries worldwide. It is based in Norwalk, Connecticut and has a market cap of $879 million.

Todd Bunton is the Growth & Income Stock Strategist for Zacks.com.

 
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