Cytec Industries: A Great Fourth Quarter Positions The Company Well For 2014

Cytec Industries (CYT) just posted a great fourth quarter. EPS came in $0.04 better than expectations and revenues were almost $28 million higher. Mr. Market liked the results as shares rose almost 2%. While shares are 4% off their recent highs, they're still 31% off the lows seen last summer. There were a lot of positives that we saw in the earnings report that lead us to believe shares are going to continue their trajectory higher. The best part is that shares are still trading at only 15 times next year's earnings.

4Q results

Revenues in 4Q were $480 million for a 2% y/y increase. All four operating segments posted growth with additive technologies posting 10% sales growth. After that, industrial materials posted a sales gain of 8% to $76 million. The two laggards in terms of sales growth were aerospace materials where sales rose 3% and process separation sales rose only 2%.

In terms of earnings, fourth quarter EPS came in at $1.15, or 22% higher than last year. For all of 2013, earnings grew 39% over 2012. The largest and most profitable division is aerospace materials, which posted operating earnings of $37.2 million in 4Q. Earnings were lower than the $41.7 million posted last year due to higher raw material costs and higher fixed costs per unit due to a planned carbon fiber shutdown. Aerospace materials also saw the loss of $3.6 million in operating earnings from the coatings resin business, which was sold.

The strongest earnings growth for Cytec was seen in the process separation division. Operating earnings were $20 million compared to $18.3 million in 4Q of last year. During the quarter, the company benefited by reducing inventories and lowering production. Still, sales were 2% higher than last year. At quarter end, days of inventory stood at 78 and were 12 days lower than the end of the third quarter.

Positive outlook going forward

In the largest operating segment, aerospace materials, we expect Cytec to benefit from a number of growth drivers this year. The biggest is the continued ramp-up and delivery of the Boeing 787.

Cytec will also benefit as more auto manufacturers look to reduce the amount of steel used in production. Cytec's expertise in carbon fibers will allow the auto companies to make this switch. This will reduce the car's weight and add to its durability. Cytec has already proven what carbon fibers can do for the aviation industry and the auto industry has taken notice. Right now, Cytec is supplying the high-performance auto market, but there is the potential to enter the mass market for auto production as Ford recently announced that it will be using more aluminum in the production of its heavy-duty F-150 pickup trucks.

Another segment that should see double-digit sales growth this year is the in process separation segment. This growth will be driven by new mine startups and a rebound in base metals prices. Last year, there were some delays in certain mine startups due to supply logistics and the remoteness of many locations. Most of these issues have now been worked out and six mine fills that were planned for last year will now proceed this year.

There's also potential outside of mining for Cytec's phosphine capabilities. Markets that Cytec is looking to tap into include fumigation, gas fracking and electronics. This is why the company has built a new plant in Canada and has upgraded its extraction plant in India.

Margin expansion continues

Gross margin in the fourth quarter rose two basis points from the prior year to 32%. We really like seeing this as the company benefited from higher selling volumes and increases in selling prices for its products. The company should see further margin improvement as a result of its ERP initiatives. The company has already completed the design phase and boosted spending by $4 million on this project in the fourth quarter. As we head into 2014, Cytec will be transitioning into the readiness, build and test phase.

We also see further margin improvement as Cytec reduces costs and improves operating efficiencies in the aerospace materials division, its largest division. The good news is that most of its airplane programs are running at or near maximum capacity. As the company works to reduce costs, we should see further margin expansion. The current operating margin is at 16.29% and we see the company being able to boost this to about 18% this year.

Strong cash flow leads to capital spending and share buybacks

In 2013, capital spending totaled $300 million as Cytec boosted capacity in its aerospace materials and in process separation divisions. Now that capacity has been expanded, we see reduced capital spending this year and will likely total about $180 million to $200 million.

Last year, Cytec also spent a total of $750 million on share buybacks. While that completed the current authorization program, we look for a new authorization program to be instituted this year, especially now that capital spending will be less this year. Cytec's balance sheet is still in good shape with $151 million in cash and $716 million in debt. There's also room to boost the annual dividend of $0.50 a share, which is only a 13% payout of earnings.

Bottom line

This year Cytec will post revenues in the neighborhood of $2 billion compared to $1.94 billion last year. The company is forecasting EPS of between $5.50 and $5.90 compared to $4.80 last year. We think the company will come in on the high-end and we see EPS of around $5.90 to $6.00. One analyst is even higher than us and has the company posting EPS of $6.06. The company has beaten EPS expectations in three of the past four quarters and we expect this trend to continue.

Analysts are bullish on the company with 6 analysts having a Strong Buy or Buy rating on the stock. Price targets on the stock are all above the current price and range from $92 to $109 with $102.50 being the median target. One notable investor who is bullish on the company is Passport Capital's John Burbank, who owns a 5.96% stake in the company. Shares are also attractive with a PEG ratio of 0.95.

All in all, we like what we're seeing from Cytec. This year EPS will be at least $1 higher than last year. For a company posting EPS growth of 20% to trade at only 15 times next year's earnings, we see shares as still being a bargain. We also expect another share repurchase program put into effect this year and a boost in the dividend.

Source: Cytec Industries: A Great Fourth Quarter Positions The Company Well For 2014

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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