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Why Ferro's Profits Aren't Enough to Excite Me

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Poor Ferro (NYSE: FOE  ) . When most chemical companies are basking in the glory of superb quarterly numbers, this one failed to meet Street estimates, and even softened its earnings outlook.

But with Ferro's third-quarter bottom line turning around from the red to black, is this company a buy?

Peeping at the numbers
Ferro's third-quarter sales grew by an unimpressive 3% from the year-ago quarter to $564 million. Though sales in most segments grew, its largest segment, electronic materials, saw revenue slipping by 6.5%, offsetting the sales growth in other segments. This looks like a concern, considering the fact that this segment was one of those that had reported the highest sales growth last year.

As expected, segments like performance coatings did well, as price hikes have been helping the paint and coatings companies boost revenues. Higher prices played a big role in driving Rockwood Holdings' (NYSE: ROC  ) third-quarter revenue up 17.4% and Sherwin-Williams' (NYSE: SHW  ) third-quarter revenue to record highs, to $2.48 billion.

With the completion of its restructuring activities, Ferro's expenses were significantly lower in the third quarter. This, paired with the top-line growth, helped Ferro's losses of $2 million turn around to a profit of $18 million year on year.

Developed markets lag
Companies that have a strong presence in the emerging markets are the happier lot today as the developed regions are getting increasingly painful. Many companies that are reporting numbers have sited one common factor -- weakening sales in Europe and the U.S.

RPM International (NYSE: RPM  ) , for instance, mentioned how weakness in these markets, especially slow construction, affected its business in its first quarter. Likewise, Ferro's last quarter's revenues, particularly in its electronics segment, were hurt by low sales in these regions.

Anticipating continuing weak economy conditions, especially in Europe, Ferro has now dimmed its outlook for its fourth quarter and the full year.

What's concerning is that weak demand in Europe and the sorry state of the solar industry there directly hurt Ferro's largest segment's sales.

The sun's becoming a problem
Sales in Ferro's electronic materials segment fell because of reduced demand for conductive pastes used in solar cell applications. Oversupply and resultant low prices in markets like Europe and Germany after they cut subsidies have become a pain in the neck for companies dealing with solar products.

The solar biggies are feeling the pain. JA Solar Holdings' (Nasdaq: JASO  ) operating profits last year, for instance, turned around to operating losses in its last reported quarter.

Even chemical giant DuPont's (NYSE: DD  ) electronics and communications segment suffered 8% lower sales volumes in the third quarter primarily because of destocking in photovoltaics (used in solar cells and panels).   

Nor surprisingly, Ferro expects sales of its electronic materials to remain weak.

For investors, this translates into lower sales and earnings for the company.

The Foolish bottom line
Things won't be very bright for Ferro as long as the solar industry and developed markets remain shaky. I'd prefer watching from the sidelines for another quarter at least. Meanwhile, there are lots of other specialty chemical companies that could be worth your watch.

To keep tracking them while keeping yourself updated on how the solar and developed markets play out for Ferro, make full use of our free watchlist service. It's the best and easiest way to stay updated on news and analysis on your favorite companies.

Neha Chamaria does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Rockwood Holdings. Motley Fool newsletter services have recommended buying shares of Sherwin-Williams. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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10/20/2016 4:02 PM
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