Even good numbers fail to impress at times. Chemical maker Olin's (NYSE: OLN) fourth quarter might have been a bumper one for the company, but it doesn't necessarily mean all is well.
I feel there are three major issues weighing down on Olin. Let's take a look.
Challenge No. 1: Weak sales volume
Olin's fourth-quarter revenue grew largely on the back of higher prices. Volumes for most of its products such as chlorine, caustic soda, and potassium hydroxide fell double-digits because of lower shipments. How long the company can sustain its top-line growth through high prices is the question here.
Olin has been raising prices, but it might not be able to realize the full benefit in the coming quarters. The company's $80-per-ton price hike announced in November may not be accepted by customers, as rival producers have announced comparatively lower price raises. Olin might just have to revise the price increase, which could mean substantially lower revenue, especially if volumes fail to buck up.
Challenge No. 2: High freight costs
Olin's freight costs have risen more than twofold in the last five years. Its fourth-quarter freight costs were 23% higher than the same period last year. This isn't surprising when transportation and logistics companies are busy rolling out rate hikes. Although Olin is devising ways of reducing them, such costs are difficult to control. What can Olin do if railroad companies keep charging more? Olin has even filed a case against two such companies for constant freight cost hikes, but a decision may take as long as two years to come through. And we don't even know if it will be in Olin's favor.
Also, Olin is increasing bleach production to lower its freight costs. Apart from having high demand, bleach is also cheaper to ship. This could be a good move, but setting up of new facilities is long process, and only time will tell up to what extent will it help lower costs. Meanwhile, Olin is expecting freight costs to go up even more in the near term -- the adverse impact of which is likely to be visible in the coming numbers.
Challenge No. 3: Ammunition business stung by costs
Olin is currently relocating its ammunition operations from Illinois to Oxford, which is weighing heavily on its Winchester business' margins. During the fourth quarter, although revenue rose nearly 9% from the comparable period last year, soaring costs pulled the segment's net earnings down by a whopping 86%.
The bad news is, this pain is unlikely to subside soon. The company is not expecting any relocation savings till the project gets completed in 2015. Apart from this, input costs have shot through the roof. Prices of lead -- the key input -- rose 14% last year, while copper and zinc prices increased by 27% and 7%, respectively. Moreover, copper prices are heading further north currently, which will add to Winchester's costs in the forthcoming quarter.
The Foolish bottom line
We'll have to wait a bit to see how Olin's restructuring and expansion moves add value to its business. Challenges are big, and the only positive seems to be its handsome dividend (Olin currently yields 3.5%).
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