These are some surprisingly challenging times for chemical companies. Not only are feedstock prices sharply rising as a result of oil prices, but companies are also having only limited success pushing through end-user price increases. Such would seem to be the case for Cytec (NYSE: CYT ) as it tries to profitably navigate between volatile supply and tough demand conditions.
Reported sales rose more than 75% in the quarter, but a huge part of that growth came from the acquisition in its surface specialties unit. Although I didn't see management specifically break out the impact of the acquisition, my own calculations suggest that organic growth was in the low single digits for the quarter. Further, while margins improved a bit in the pre-existing businesses, the specialty surfaces unit saw margins decline, and the company's overall operating margin shrunk a bit. At the very bottom line, adjusting for items, earnings in the quarter increased about 20%.
Across the company's performance I think I picked up certain themes. The company is working diligently to exit less-profitable businesses (particularly in the performance specialties unit); industrial demand is tenuous; and the Gulf hurricanes not only raised feedstock prices, but also hurt supply reliability and damaged some Cytec facilities.
On a more positive note, the company is seeing good growth in the engineered-materials business. Not only is the revival in commercial aerospace improving orders from the likes of Boeing (NYSE: BA ) and Airbus, but Cytec is also starting to see strong demand for composites in the high-performance auto market. Given the various benefits of substituting composites for metals (including weight reduction), Cytec should continue to see growth here as the composite content increases in planes, helicopters, and some cars.
Though the company is benefiting from the commercial aerospace uptick, as well as strong demand for mining chemicals, the overall picture is more muddled. It doesn't help that Cytec competes with a wide range of major companies, including BASF (NYSE: BF ) , Air Products (NYSE: APD ) , and Dow Chemical (NYSE: DOW ) .
Large and savvy competitors make high sustainable returns on capital difficult -- and it's no exception here. Although there might be a relative value argument that makes Cytec shares look like more of a bargain, I don't see a really compelling reason to get excited about a company that is stuck between rising costs and possibly flagging demand.
More Foolishness on chemicals:
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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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