Rating Update: Stock Rating C-Neutral (5/16/19)-Quaker Chemical Corp (KWR).

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BUSINESS

Quaker Chemical Corporation develops, produces, and markets various formulated chemical specialty products for a range of heavy industrial and manufacturing applications in North America, Europe, the Middle East, Africa, the Asia/Pacific, and South America. Its products include rolling lubricants used by manufacturers of steel in the hot and cold rolling of steel, and aluminum in the hot rolling of aluminum; machining and grinding compounds for use in cutting, shaping, and grinding metal parts; hydraulic fluids for steel, metalworking, and other customers to operate hydraulic equipment; corrosion preventives to protect metals during manufacture, storage, and shipment; and specialty greases used in automotive and aerospace production processes, steel manufacturing, and various other applications.
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INVESTMENT RATING

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KWR’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be a major Value Builder.

Quaker Chemical has a current Value Trend Rating of C (Neutral).
The Value Trend Rating reflects very contradictory signals from PTR’s two proprietary measures of a stock’s attractiveness. Quaker Chemical has a poor Appreciation Score of 25 but a good Power Rating of 72, and the Neutral Value Trend Rating results.

Quaker Chemical’s stock is selling well above targeted value. The current stock price of $201.32 compares to targeted value 12 months forward of $149.
Quaker Chemical’s low appreciation potential results in an appreciation score of 25 (75% of the universe has greater appreciation potential.)
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Quaker Chemical has a Power Rating of 72. (This good Power Rating indicates that KWR has a better chance of achieving attractive investment performance over the near to intermediate term than all but 28% of companies in the universe.)
Factors contributing to this good Power Rating include: recent price action has been favorable; and earnings estimate behavior for KWR has been slightly favorable recently. An offsetting factor is is currently in an unfavorable positi.

INVESTMENT PROFILE

KWR’s financial strength is high. Financial strength rating is 83.
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Relative to the S&P 500 Composite, Quaker Chemical Corp has neutral Growth/Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that KWR is normal risk. Low financial leverage is a positive for KWR. Relative weaknesses include: high stock price volatility, and low historical growth. KWR’s valuation is high: low dividend yield, high P/E ratio, and high price/book ratio. KWR has unusually low market capitalization.

CURRENT SIGNALS

Quaker Chemical’s current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; falling tax keep rate; and falling leverage.

Quaker Chemical’s current technical position is very strong. The stock price is in a 4.2 month up move. The stock has appreciated 30.3% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

Marginal positive changes in Quaker Chemical Corporation (NYSE: KWR) fundamentals have recently occurred: significant quarterly earnings acceleration occurred.
The stock is currently rated C.
Quaker Chemical Corporation (NYSE: KWR) stock closed at $0.00 on 5/16/19 after a major increase of 30.0%. However, below average trading volume at 71% of normal accompanied the advance. The stock has declined -3.4% during the last week but has been exceptionally strong relative to the market over the last nine months.

CASH FLOW

In 2018, Quaker Chemical generated a significant increase in cash of +$14.3 million (+16%). Sources of cash were larger than uses. Cash generated from 2018 EBITDA totalled +$124.2 million. Non-operating uses consumed -$17.3 million (-14% of EBITDA). Cash taxes consumed -$24.7 million (-20% of EBITDA). Re-investment in the business amounted to -$3.0 million (-2% of EBITDA). On a net basis, debt investors removed -$32.9 million (-26% of EBITDA) while equity investors received -$32.1 million (-26% of EBITDA).
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Quaker Chemical’s Non-operating Income, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Quaker Chemical Corp Peer Group. In most years, Quaker Chemical was in the top quartile and third quartile. Currently, Quaker Chemical is below median at -14% of EBITDA (-$17.3 million).

Quaker Chemical’s Cash Taxes, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Quaker Chemical Corp Peer Group. In most years, Quaker Chemical was in the second quartile and third quartile. Currently, Quaker Chemical is at the lower quartile at -20% of EBITDA (-$24.7 million).

Quaker Chemical’s Business Re-investment, %EBITDA has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by an opposite trend for the Quaker Chemical Corp Peer Group. (Since 2014 Business Re-investment, %EBITDA has accelerated very sharply.) In most years, Quaker Chemical was in the top quartile and third quartile. Currently, Quaker Chemical is upper quartile at -2% of EBITDA (-$3.0 million).

Quaker Chemical’s Debt Investors, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Quaker Chemical Corp Peer Group. In most years, Quaker Chemical was in the third quartile and top quartile. Currently, Quaker Chemical is below median at -26% of EBITDA (-$32.9 million).

Quaker Chemical’s Equity Investors, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Quaker Chemical Corp Peer Group. In most years, Quaker Chemical was in the third quartile and second quartile. Currently, Quaker Chemical is slightly above median at -26% of EBITDA (-$32.1 million).

Quaker Chemical’s Change in Cash, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by stability for the Quaker Chemical Corp Peer Group. In most years, Quaker Chemical was in the third quartile and second quartile. Currently, Quaker Chemical is substantially above median at +11% of EBITDA (+$14.3 million).
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Quaker Chemical’s Cash, %Revenue has exhibited a very small overall uptrend over the period. This improvement was accompanied by stability for the Quaker Chemical Corp Peer Group. In most years, Quaker Chemical was in the third quartile and second quartile. Currently, Quaker Chemical is substantially above median at +12%.

PROFITABILITY

Quaker Chemical’s return on equity has eroded significantly since 2009 although it experienced a very sharp recovery after the 2017 low.
Quaker Chemical’s strong positive trend in pretax operating return significantly offset by a very strong negative trend in non-operating factors is a major performance consideration.
The productivity of Quaker Chemical’s assets declined over the full period 2009-2018: asset turnover has experienced a downtrend.
More than offsetting this trend, however, pretax margin enjoyed a strong overall uptrend that accelerated very sharply from the 2017 level.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
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Quaker Chemical’s return on equity is slightly above median (13.7%) for the four quarters ended December, 2018.
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Operating performance (pretax return on assets) is at the upper quartile (12.0%) reflecting asset turnover that is upper quartile (1.22X) and above median pretax margin (9.8%).
Tax “keep” rate (income tax management) is at the lower quartile (70.1%) resulting in after tax return on assets that is at the upper quartile.
Financial leverage (leverage) is at the lower quartile (1.63X).

GROWTH RATES

Overall, Quaker Chemical’s growth rate has slowed considerably in recent years.
Quaker Chemical’s historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.

Annual revenue growth has been 3.8% per year.

Total asset growth has been 4.5% per year.

Annual E.P.S. growth has been 6.9% per year.

Equity growth has been 9.0% per year. (More recently it has been 4.4%.)

Quaker Chemical’s consensus growth rate forecast (average of Wall Street analysts) is 12.2% — substantially above the average of the historical growth measures.
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Relative to the Quaker Chemical Corp Peer Group, Quaker Chemical’s historical growth measures are erratic. E.P.S. growth (6.9%) has been slightly above median. Revenue growth (3.8%) has been at median. Equity growth (9.0%) has been slightly below median. Total asset growth (4.5%) has been below median.

Consensus growth forecast (12.2%) is at median.
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PRICE HISTORY

Over the full time period, Quaker Chemical’s stock price performance has been variable and exceptional. Between July, 2008 and May, 2019, Quaker Chemical’s stock price rose +574%; relative to the market, this was a +197% gain. Significant price moves during the period: 1) January, 2016 – April, 2019: +198%; 2) September, 2011 – July, 2015: +258%; 3) January, 2010 – April, 2011: +158%; 4) February, 2009 – September, 2009: +290%; and 5) December, 2008 – February, 2009: -66%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 53.4% is upper quartile relative to the S&P 500 Composite.
In addition to being upper quartile relative to S&P 500 Composite, current annual total return performance through April, 2019 of 53.4% is upper quartile relative to Quaker Chemical Corp Peer Group.

Current 5-year total return performance of 26.1% is upper quartile relative to the S&P 500 Composite.
Through April, 2019, with upper quartile current 5-year total return of 26.1% relative to S&P 500 Composite, Quaker Chemical’s total return performance is upper quartile relative to Quaker Chemical Corp Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, KWR’s overall valuation is quite high. Four of five factors are lower quartile. The highest factor is the ratio of enterprise value/assets, followed by the price/earnings ratio, then by the price/equity ratio, then by the ratio of enterprise value/earnings before interest and taxes. The lowest factor, ratio of enterprise value/revenue, is slightly below median.

Relative to Quaker Chemical Corp Peer Group, KWR’s overall valuation is quite high. The highest factor, the price/equity ratio, is upper quartile. Price/earnings ratio is upper quartile. Ratio of enterprise value/assets is upper quartile. Ratio of enterprise value/revenue is at the upper quartile. The lowest factor, the ratio of enterprise value/earnings before interest and taxes, is at the upper quartile.
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Quaker Chemical has a major value gap compared to the median valuation. For KWR to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 3.02X to 1.90X. If KWR’s ratio of enterprise value/revenue were to fall to 1.90X, its stock price would be lower by $-73 to $129.
For KWR to fall to lower quartile valuation relative to the Quaker Chemical Corp Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 3.02X to 1.36X. If KWR’s ratio of enterprise value/revenue were to fall to 1.36X, its stock price would decline by $-108 from the current level of $201.

VALUE TARGETS

KWR’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be a major Value Builder.
Quaker Chemical’s current Price Target of $161 represents a -20% change from the current price of $201.32.
Quaker Chemical’s low appreciation potential results in an appreciation score of 25 (75% of the universe has greater appreciation potential.)
Notwithstanding this low Appreciation Score of 25, the high Power Rating of 72 results in an Value Trend Rating of C.
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Quaker Chemical’s current Price Target is $161 (+32% from the 2018 Target of $122 but -20% from the 05/16/19 price of $201.32). This rise in the Target is the result of a +9% increase in the equity base and a +21% increase in the price/equity multiple. The forecasted increase in return on equity has a very large positive impact on the price/equity multiple and the forecasted increase in growth has a large positive impact as well. Partially offsetting these Drivers, the forecasted increase in cost of equity has a very large negative impact.
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PTR’s return on equity forecast is 25.9% — above our recent forecasts. Forecasted return on equity exhibited a slight, erratic increase between 2010 and 2018. The current forecast is significantly above the 2016 low of 15%.

PTR’s growth forecast is 6.0% — in line with our recent forecasts. Forecasted growth exhibited a modest, erratic decline between 2010 and 2018. The current forecast is below the 2014 peak of 8%.

PTR’s cost of equity forecast is 9.9% — in line with recent levels. Forecasted cost of equity exhibited a slight, erratic increase between 2010 and 2018. The current forecast is above the 2010 low of 7.6%.
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At Quaker Chemical’s current price of $201.32, investors are placing a positive value of $99 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 4.0% per year, and a return on equity of 20.4% versus a cost of equity of 8.2%.
PTR’s 2020 Price Target of $161 is based on these forecasts and reflects an estimated value of existing assets of $104 and a value of future investments of $57.

About John Lafferty 44922 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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