I Like This Chemical Company

One pigment has been driving the chemical industry crazy, giving its lucky producers a big advantage. And Kronos Worldwide (NYSE: KRO  ) sure didn't want to miss the bus.

The specialty chemical company appreciates the moola the white pigment has brought in. Its third-quarter numbers have been superb, thanks to its aggressive price hike strategy.

Kronos, however, doesn't have any current expansion plans. But this shouldn't scare you, as some things hint at good growth of its revenues in the near future. What am I talking about? Read along to find out.

Happy days are here
Those who regularly read my articles must have guessed by now what white magic I was referring to. Titanium dioxide (TiO2), of course! How could this pigment not do to Kronos what it did to chemical giants DuPont (NYSE: DD  ) and Dow Chemical (NYSE: DOW  ) ?

All these companies have exhibited one common trend -- a superb jump in revenues because of soaring TiO2 prices, despite lower sales volumes.

DuPont's third-quarter volumes were 1% lower, but high prices drove its revenues up by 32% to $9.2 billion. Along similar lines, Dow Chemical's third-quarter volumes were flat year on year, but high product prices helped the world's largest TiO2 producer's revenues grow 17% to $15.1 billion.

Kronos' sales volumes were also 1% lower in the last quarter, but its average TiO2 prices were 41% higher than last year. As a result, its net sales climbed an astounding 47% from the year-ago quarter to $548 million. Backed by strong revenues, Kronos' net income surged to $85.9 million from $32.1 million a year ago.

What to expect now?
As I had pointed out in the last quarter, Kronos doesn't see any additional production coming in the near term. It is operating its plants at full capacity and has no current plans of expanding. This isn't very surprising though, considering the fact that it isn't easy to add new production capacity in chemical companies, as it requires huge investments and the process might take several years to become fully functional.

The only company I can think of right now that is expanding TiO2 capabilities is DuPont. But this looks feasible for a company of its large scale, something that is not easy for Kronos to do.

In such situations, what should come to the rescue of Kronos is the tight TiO2 market conditions and the expected global demand outpacing supply. This will keep demand for the pigment high, giving Kronos the chance to push its entire production off the shelves.

Also, the company is in no mood to give its customers any relief so soon. The way Kronos has been hiking prices for a year is amazing! And it will continue to do so in the forthcoming quarters.

Again, Kronos is not alone here. DuPont's latest price increases will be reflected in its future revenues. Huntsman (NYSE: HUN  ) is ready to pass on the buck each time its input costs become a pain. Rockwood Holdings' (NYSE: ROC  ) is also sold out on TiO2, and sees no production or volume growth, but expects prices to rise by 8% in the forthcoming quarter.

Clearly, this passing-the-buck strategy should be enough to keep Kronos' revenues rolling.

The Foolish bottom line
The demand-supply industry situation should work well in Kronos' favor. Moreover, as I said earlier, the price benefit is here to stay. This should take care of Kronos' future revenues.

For the dividend lovers, Kronos also gives a decent dividend yield of 2.7%. I think these reasons are enough to maintain a watchful eye on the stock. It will also be interesting to see how Kronos balances its high prices and low volumes in the future. To stay updated on this and more, do not forget to add Kronos to your Watchlist, our free and personalized stock-tracking service.

Fool contributor Neha Chamaria does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Rockwood Holdings. 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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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 16, 2011, at 2:37 PM, Acidicone wrote:

    I appreciate the article on Kronos, and the points made are certainly valid and pertains to the other producers as well. I just want to point out that Dow is not a player in the TiO2 market. It's one of the few chemical raw materials that they don't manufacture. I know their earnings are up as well, but it's from other chemical manufacturing units.

  • Report this Comment On November 27, 2011, at 8:32 PM, 007wiseFool007 wrote:

    where is TIE in this picture? were they not a player in the TiO2 market?

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