Monday, May 11, 2009

OM Group (OMG) is a Specialty Chemical Company that's Too Cheap

5/8/2009 1:12 PM EDT

I've taken a long position in OM Group (OMG). OMG operates prdominantly in two segments: Advanced Materials and Specialty Chemicals (especially used for memory disks and circuit boards). It is a big cobalt refiner, so the price of that underlying commodity is also a driver on the stock price.

It's a conservatively run company with $272 million in cash and only $26 million in long-term debt. It's most recent quarter, announced yesterday, had a small loss. However, it's expecting to stay cash flow positive this year and a weaker dollar, recovering commodity prices, and increasing chemical demand (with Dow's recent earnings being encouraging) should all help the company's future results.

The stock sold off yesterday and has bounced back today. In my view, there's still a lot of value here. The stock currently trades an a trailing 2.2x Enterprise Value to EBITDA ratio. That's just too cheap, when you consider DOW's is currently 7.4x.

As OMG delivers future positive quarters, expect its stock price to jump.

Position: Long OMG

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