2 for Tuesday: Profit From the Asbestos Hysteria

Rohm & Haas (ROH) has asbestos exposure. But that's why you should be interested in it -- to buy, not to sell.

Along with a slew of other well-managed industrial companies that should experience strong earnings growth when the economy rebounds but have the "A" word mentioned in their financial statements, Rohm & Haas is getting cheap. And while I concede that it is difficult to quantify what amount some companies will ultimately pay for asbestos claims, I think Rohm & Haas should be way down on that particular list of worries.

Rohm & Haas is a specialty chemical company with roughly $6 billion in sales. It is focused on performance polymers (including coatings, adhesives and sealants, accounting for 57% of total sales), electronic materials (used in the manufacture of semiconductor chips and printed wiring boards, 20% of total sales), chemical specialties (mostly in preservatives and polymers used in consumer products like laundry detergent and water purification, 14% of sales) and salt (15% of sales).

This is a well-run company that is gaining share in most of its core end markets. However, like other chemical companies that are heavily dependent on the economy, Rohm & Haas had a tough 2001. Earnings per share are likely to come in around 87 cents when the company reports on Feb. 4, down from $1.73 in 2000.

The Stock Rohm & Haas (ROH:NYSE)
Recent Stock Price:	$33.03
52-Week Range:	$24.90-$38.70
P/E Ratio:	n/a
Market Capitalization:	$7.28 billion
Float:	141.0 million shares
Short Interest Ratio:	2.29
Institutional Ownership:	63%
Source: Yahoo! Finance

But Rohm & Haas is positioned for a big turnaround in 2002. Earnings per share could jump nearly 50% this year to $1.28 (in part to the change in accounting for goodwill expense). The likelihood of lower raw material costs (thanks to lower energy prices) and aggressive cost-cutting ($200 million taken out by October 2002) gives the company a great boost to the bottom line with just a small improvement in sales.

Furthermore, Rohm & Haas has a strong balance sheet (debt-to-capital ratio of less than 40%) and good cash flow. The company is maintaining capital expenditures below its depreciation levels of about $400 million.

But getting back to asbestos. Rohm & Haas acquired Morton International in 1999, and, with it, a number of asbestos lawsuits. According to Rohm & Haas' 10-Q for the third quarter of 2001, the first set of lawsuits addresses employee exposure to asbestos at a manufacturing facility in Weeks Island, La. Rohm & Haas expects that most of these cases will be dismissed because they are barred under workers' compensation laws. Some cases, however -- those involving asbestos-caused malignancies -- may not be barred under Louisiana law.

In the 10-Q, Rohm & Haas says that it "commissioned medical studies to estimate possible future claims and recorded accruals based on those results." Rohm & Haas' director of investor relations Cheryl Martin says, "We don't have significant exposure." I believe her. These cases are limited to one plant that had asbestos in it, probably in the insulation, so the pool of potential claimants is finite. The cases are not related to a product Morton manufactured that had asbestos in it.

The Stats
Year	Revenue (in billions)	EPS
1999	$5.374	$2.09
2000	6.879	1.73
2001*	5.721	0.87
2002*	5.835	1.28
*Thomson Financial/First Call estimates. Source: Company reports

There is a group of product-liability cases, however, involving a brake-pad business that Morton owned in 1983. Martin says these claims are fully covered by insurance. Rohm & Haas' accruals for asbestos litigation are not broken out separately, but Martin told me that they are "significantly less" than the $164 million set aside for environmental liabilities.

When it comes to asbestos, if you want to throw the baby out with the bathwater, go ahead and dump Rohm & Haas. But I believe the risks are minimal and well-accounted for at this company. At $32, Rohm & Haas is a good deal, although it could become an even better buy if asbestos worries continue to spiral beyond rational bounds.

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