Improving Utilization Rates Could Help SOA, Jefferies Reports

Jefferies reports that it recently hosted investor meetings with Solutia SOA management. Key topics included operating leverage to improving utilization rates, potential divestitures and vertical integration, and levers to further improve Solutia's relative cost position. “We estimate improving utilization rates could add as much as $0.65 to Solutia's earnings power by 2012, with the opportunity largely split between the Technical Specialties and Interlayer Films segments,” Jefferies writes. “We estimate divestitures, while neutral on an EPS basis, could lift reported margins by 30-70bps. Given a 20% ROIC hurdle for both capex and acquisitions, we expect the company to emphasize small bolt-on M&A, with capital potentially deployed to vertically integrate in EVA resin or PVOH.” At the same time, Jefferies said that the company may be able to further improve its relative cost position by introducing new process technologies in Crystex and in PVB that would reduce both capital intensity and operating costs. Solutia closed Monday at $23.41.