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NewMarket Corp -- >>> Don't Miss Out On NewMarket Corp.



Dec. 26, 2013



http://seekingalpha.com/article/1917571-dont-miss-out-on-newmarket-corp?source=yahoo



NewMarket Corp. (NEU) is a holding company involved in formulating and manufacturing a variety of petroleum additives. In addition to additives, lubricants and similar products, NEU diversified its operations to include real estate development through its NewMarket Development Corporation.

Real Estate Development News

As of this writing, NEU's real estate development is limited to Foundry Park I LLC in Richmond, Va. In FY 2012, NewMarket used proceeds from a debt restructuring scheme to pay off its Foundry Park property mortgage. Then, in July 2013, NewMarket's real estate operations succeeded in a profitable property sale.

The takeaway is that NewMarket's foray into real estate development hints at smart management that can manage debt and construction costs/risks without compromising other critical operations and financial stability. If NEU continues its real estate development operations in a manner similar to its Foundry Park I project, such moves would bode very well for the company and its shareholders.

Business Strategy

The core of NewMarket's business is petroleum additives and petroleum-derived lubricants. Afton Chemical is a NewMarket subsidiary that invests in R&D and manufacture of additives for the following:
•Metalworking and hydraulic industrial use
•Fuels, including heating oils
•Gear oil and related driveline additives
•Engine oil for personal, heavy-duty and motorcycle engines

Afton seems optimistic about future demand for its additives. In 2012, the company announced a substantial, long-term investment in a Singapore additives manufacturing facility. This makes intuitive sense since the Asian region is very likely to see consistent economic growth and with it, more demand for vehicles and associated oils and fuels -- therefore, additives.

Product Formulation Overview

A comprehensive analysis of oil additive chemistry in one article is unfeasible. Nevertheless, a synopsis of an Afton specialty will help prospective investors to chow down the dynamics and considerations of oil additive production. Some professional investors and money managers emphasize understanding business products and other deliverables more than technical stock price movement analysis or an exclusive focus on financial statements. The following section will help readers to do just that with regard to NEU's main profit drivers.

Oil additives exist for a variety of purposes. Some additives reduce oxidation of both oil and mechanical components. Others fight the accumulation of thick oil sludge deposits and/or particulate clogs composed of suspended soot and dirt. Still others protect mechanical components from friction and corrosion encountered during normal operations. Here, the focus is on calibrating oil viscosity through additives.

Regarding viscosity: if oil is too viscous, flow to all engine parts is not optimal. Excessively thick oil may miss small nooks and crannies that rely on proper lubrication and other types of protection mentioned above. Thick oil becomes a bigger concern in cold environments. Vehicle components that are insufficiently coated in oil suffer accelerated mechanical damage, cracks, friction-induced wear and tear, and oxidative corrosion (rust). On the other hand, if oil viscosity is too low -- if the oil is too "thin" -- it will not have sufficient staying power to coat and lubricate engine parts. Thus, oil viscosity is a very important variable that needs to be fine-tuned in order to avoid quick wear and tear. A viscosity index (VI) is used to summarize oil viscosity in response to changing temperatures.

Seeing as how engine parts experience a wide temperature range, oil needs to be within acceptable viscosity range in all points at those temperatures. Temperatures of 38 and 99 Celsius are used for reference viscosity measurements that are then applied in a calculation to categorize general VI of a given oil/additive blend. Note that even though VI uses 99 degrees Celsius as a reference measurement, engine parts can heat up to 200 degrees Celsius. Therefore, all oil/additive combinations delivered for customer use must be rigorously tested for viscosity at or even above 200 Celsius. Among other desired properties, an oil additive has to be chemically stable so that oil viscosity can remain optimal or near-optimal for a long time.

Risks

Relying on only a few key suppliers and production facilities is NEU's most prominent weakness. Vulnerability from supply disruptions is a substantial risk that can hurt NEU operations. The company is also subject to considerable concentrated production risk. Operations and are sales subject to potentially large losses in case of a severe, high-cost facility problem such as a major fire or direct hit by a powerful natural disaster.

There is substantial risk inherent in R&D projects. Though improvements and breakthroughs can yield great profits for NEU, there is a substantial chance that research will eat up costs without a corresponding payoff. The good thing for NEU and its Afton Chemical subsidiary is that these R&D risks are also present in all existing and any potential competitors. Furthermore, Afton's strong intellectual property portfolio with regard to oil additive science and formulations mean that it has a substantial moat around its edge in the oil additives market. Despite the uncertain nature of R&D, it is unlikely to be a significant drain on future stock prices considering Afton's already-strong position and intellectual-property "fortification" in that regard.

NewMarket does not shy away from using financial derivatives. Despite an air of reckless gambling surrounding derivatives since the 2008-09 recession, NewMarket makes it very clear in its FY 2012 10-K that it uses derivatives only for hedging against currency and interest rate fluctuation risk, not to execute speculative trades.

Net Margin and Revenue History

NEU's net profit margin has had a pretty good run. There's little reason to expect this trend will end. The only time net profit hit negative territory was in FY 2001 when it dropped to -14.5%. The slump did not last, with FY 2002 seeing 1.45%, with subsequent years giving consistently better results. What's particularly encouraging is that the 2008-09 recession did not impact NewMarket heavily. In fact, net profit margin increased from 4.53 percent in 2008 to 10.61% in 2009. This is especially impressive since NEU revenues fell from $1.62B in 2008 to $1.53B in 2009.

NewMarket has a record of smart cost control. In the face of shrinking revenue, cutting wildly is tempting. The trick is to do so without harm to current operations and future earnings prospects. NEU's margin and revenue history shows that it can function in a tough economic environment without short-changing current or prospective shareholders.

Summary

As outlined in its latest 10-K, NewMarket has substantial supplier and production risk. An interruption at either stage of its value chain will cut deeply. Also, investors would be smart to consider NEU's recent phenomenal rise. It's tempting to think that NEU's run is over when stock price increased more than 800 percent in the last five years. However, despite the risk and stock price stumbling points mentioned above, the company is still a "Buy." NewMarket is very likely to reward investors with plenty of capital gains in years to come.

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