Deutsche Bank Comments On OMNOVA Solutions Following Dismal Guidance

OMNOVA's OMN shares fell 7% after its Q4 release as ‘11 EPS guidance of ~$0.62 was ~$0.35 below consensus. Deutsche Bank believes management's cautious outlook reflects a tough comparison with record ‘10 for Performance Chemicals and Eliokem, rising raw material costs, a higher tax rate, and modest earnings dilution from Eliokem. OMNOVA reported Q4 earnings from operations of $0.18, down 29%, and $0.07 below consensus. A higher than expected tax rate cost $0.05. The miss was driven by higher than expected Other Expense reflecting an FX hedge fair value adjustment loss. Sales increased 10% on higher selling prices and higher volumes. Raw material costs have emerged as OMNOVA's biggest challenge in 2011 as styrene and butadiene prices have already risen sharply in early Q1. Deutsche Bank expects Performance Chemicals will be able to fully offset these pressures with pricing actions, global sourcing efforts, and productivity gains. Closing the pricing/cost gap in Decorative Products will take longer due to weak and fragmented end-markets. To reflect rising raw material costs, a $0.20 headwind from a higher tax rate, and modest earnings dilution from the Eliokem acquisition, DB is lowering its 2011E EPS by $0.35 to $0.65, flat YoY. DB has a $9 PT and Buy rating on OMN OMN closed Wednesday at $7.75