Kronos Worldwide: Unleash The Titan

Kronos is a Dallas-based $3.4B market cap ($3.5B enterprise value) commodity chemicals company that pays a quarterly common dividend of $0.15 per share for an annualized dividend yield of 2.1%.

The company sells its products under the Kronos brand through distributors and agents to paint, plastics, decorative laminate, paper manufacturers, and other parties.

Making the world brighter

According to the company:

“We take pride in making the world brighter with the most effective whitening agent in the world titanium dioxide. This inorganic compound pigment makes hundreds of things white from your computer mouse to the paint on your wall. Paper, toothpaste, sunscreen, cosmetics and just about any other commonplace item colored white contains KRONOS TiO2. TiO2 also makes colors as brilliant as they can be.

Weve been making TiO2 for nearly a century now, beginning in 1916 with anatase TiO2 pigments. In 1939, KRONOS began marketing the first rutile TiO2 pigment. Delivering more effective “hiding power,” rutile TiO2 has since replaced anatase in paints, coatings and plastics.”

Kronos, son of Zeus (aka, the late Harold Simmons)

Kronos is a subsidiary of Valhi, Inc. (VHI), a Dallas-based specialty chemicals company with a $2B market cap.

Valhi in turn is a subsidiary of Contran Corporation, a holding company for the evil LBO genius of Dallas, Harold Simmons, who died in 2013. Contran owns 80.5% of KRO and 92.6% of VHI.

(Incidentally, the operating structure and history of growth through smart acquisitions and management is a reminiscent story behind the rise of Bernard Arnault and The Arnault Family Group, which is the majority controlling shareholder in LVMH Mo毛t Hennessy Louis Vuitton S.E. (OTCPK:LVMUY) and Christian Dior SE in the ultra-luxury goods industry.)

The current CEO is Robert D. Graham, a former lawyer who has served as an executive in various officer positions in the Contran family since 2002. Graham became CEO of Kronos in January 2017 after former CEO Bobby D. O’Brien retired.

CFO Gregory Swalwell and COO James Buch have also served in various Contran related businesses for some time, including the formerly owned Titanium Metals.

(Interestingly, since 2012, Titanium Metals has been a subsidiary of Precision Castparts, the company that Warren Buffett’s Berkshire Hathaway (BRK.B) (NYSE:BRK.A) acquired for $37.2B for in August 2015.)

KRO is up +11.14% MTD, but we see ongoing potential

We took a deeper look at KRO after it reached a short-term price target today, November 24, in our theoretical long model portfolio (see 36 Stocks for November 2017). For the purpose of anyone using our model portfolio to generate long-term investing ideas, and time permitting, we review stock holdings in some greater detail. We were pleasantly surprised to see that KRO will likely be retained in our long model portfolio when we update our stock rankings next month given its in line relative valuation, strong recent track record of operating momentum, and continued strong prospects.

KRO was assumed to have been added to our theoretical model portfolio as of October 5, 2017 at the closing price of $23.83 that day – the stock has appreciated 22.7% since then.

Consensus 2018 EBITDA raised 17% after 3Q17 report

On November 8, Kronos reported 3Q17 results, with revenue of $464.6M ahead of consensus by $16.5M, and EPS of $0.57 ahead of consensus of $0.43. 3Q17 EBITDA was $102.5M, up from $38.0M last year. Trailing 12-month EBITDA were $308.1M, up nearly 6x over last year.

The solid quarter benefited from higher average selling prices, higher sales and production volumes and higher raw materials and other production costs. In addition, results include the recognition of a non-cash deferred income tax benefit.

The company’s TiO2 segment profit in 3Q17 was $95.0M versus $31.0M in 3Q16. For the first nine months of 2017, TiO2 segment profit of $225.2M grew more than 5x from $48.2M in the same period of last year.

Relative Valuation is Fine

The stock is trading at 8.4x NTM EBITDA, only slightly above a six-peer average of 8.0x, yet it is experiencing a surge in capital efficiency ratios and consensus estimate revisions. On a NTM PE basis, KRO’s stock at 13.2x is at a discount to the group mean of 17.6x.

ROA for its September quarter was 11.3%, up from 9.3% in the June quarter and 0.7% last year. The LTM gross margin has more than doubled to 29.3% from last year, and the EBITDA margin of 19.1% has expended nearly 5x.

2018 consensus estimates for revenue and EBITDA have increased +2.5% and +16.9% to $1,762M and $450M, respectively, from the beginning of the month.

Relative valuation on NTM consensus estimates

Company Name Ticker TEV / EBITDA P / E
Venator Materials PLC (VNTR) 5.9x 8.4x
Tronox Inc. (TROX) 7.0x 26.2x
Cabot Corporation (CBT) 8.5x 16.3x
Trinseo S.A. (TSE) 6.3x 8.6x
Westlake Chemical Corp. (WLK) 7.4x 13.6x
Calgon Carbon Corp. (NYSE:CCC) 12.6x 32.7x
Kronos Worldwide, Inc. [KRO] 8.4x 13.2x
Six-peer mean 8.0x 17.6x

TiO2 Market May Nearly Double to $24.5B by 2024

Kronos is a cyclical company so investors should learn where KRO is on the cycle. According to Hexa Research, the global titanium dioxide market was estimated at $13.7B in 2016 and is expected to reach $24.5B by 2024. That is a compound growth rate of 7.6% over eight years.

According to Hexa Research, titanium dioxide demand is experiencing increasing use in paints, plastics, paper & pulp, cosmetics, inks, fibers, rubber, food and pharmaceuticals:

Over the past few years, the market of doped titanium dioxide nanoparticles has been increasing owing to its increasing application in solar cells. Doping of nanoparticles helps in enhancing amount of absorption in visible light. For instance, tungsten doped titanium dioxide nanoparticles are used in photo catalysis of sunlight and visible light, widening its application in solar energy.

Under-followed by the sell side, strong growth potential

The stock does not seem overvalued relative to its peers, relative to its recent surge in growth, and relative to prospects. Therefore, we think there is a good chance KRO will be retained in our theoretical long model portfolio when we update our rankings some time in the next 7-10 days.

In addition, the company appears under-followed by the sell side (consensus is composed of 1-3 analysts) and is experiencing exceptional growth.

This preliminary overview lays out a compelling long-term case for the stock, and we would expect deeper work on this name has a high likelihood of proving it to be a long-term winner for small cap portfolio managers.

Model Portfolio Stock Selection Criteria

Our criteria for selecting stocks in these model portfolio strategies, which heavily weight proxies for cash flow growth and ROIC, include the following:

Relative Value Operating Momentum Consensus Estimate Revision Momentum Fundamental Quality

We rebalance our model portfolios every month and have been tracking long-only and long/short theoretical daily returns since March 31, 2009 (up +474.4% and 378.5% through October 31, 2017, respectively).

These models also tend to generate some solid ideas for 12-month holding periods (up an average +25.60% versus an average of +15.87% for the S&P 500 Index since December 31, 2015).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: As a simple quantitative model based on fundamental rankings, the portfolio models do not take into account rumors or pending M&A transactions. Theoretical return data reflect simple cumulative returns (not compound returns) and do not assume the impact of costs such as execution fees, margin fees, slippage, the availability of stocks for short selling, or any other kind of cost. There are limitations inherent in our theoretical model results, particularly with the fact that such results do not represent actual trading and they may not reflect the impact material economic and market factors might have had on our decision making if we were actually managing client money. We do our best to provide accurate information in this report, but do not guarantee its accuracy.

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