By Stephen D. Simpson, CFA
July 1, 2005
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More than a few things have changed since I last wrote on OM Group (NYSE: OMG). Cobalt prices have slid a bit, but this Ohio-based metal producer and refiner has added a new CEO and has made a lot of progress in getting caught up on its SEC filings.
Results for the first quarter don't look particularly strong. Sales softened slightly and were down 4% compared with the year-ago quarter. Revenues from the cobalt group were down less than 3%, but nickel sales fell by about 7%.
Profitability, though, dropped off more sharply. Gross margin was nearly cut in half, and reported net income fell by 61%. Looking at segment operating profits, cobalt dropped most sharply (84%), though nickel had a significant drop as well (33%).
In the case of cobalt, refining volumes rose 8%, but product sales volumes dropped 4%. While the quarter-to-quarter drop in cobalt prices wasn't too severe, the year-over-year drop was on the order of 30%, and the price has continued to slide a bit since then. Reported inventory in the cobalt group climbed 29% year over year. Though sales to the battery market were soft as customers worked off inventory, I don't think there are any fundamental changes in cobalt demand presently under way.
On the nickel side of the business, sales volumes dropped 8%, and refining volumes were down 12%. Despite weakness in the stainless steel market, pricing for nickel has stayed very strong, and most producers are capacity-constrained. While reported nickel inventory at OM Group climbed almost 43% from the year-ago period, management seems confident about demand and thinks it will be running at, or near, capacity in the back half of the year.
As is quite often the case when you see such low P/Es, the market is not expecting a lot of fireworks from OM Group. While metals demand should stay firm (particularly in the case of nickel), production is on the upswing, particularly in China. Further, management expectations are obviously tied to metal prices, and while assumptions about future nickel prices are probably sound, management expectations on cobalt might not be so easy to achieve.
Risks aside, this company is starting to look more interesting to me. A new CEO brings a breath of fresh air and new enthusiasm to the top spot. What's more, while OM Group may deserve some discount to the likes of Engelhard (NYSE: EC), Inco (NYSE: N), and other miners/refiners, the current discount is beginning to seem a bit exaggerated.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
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