Cash Coating Helps Rohm & Haas

There still may be legitimate reasons to question the current industrial recovery, but those doubts seemed to be seriously tested last week. The latest economic indicators and recent remarks from Federal Reserve Chairman Alan Greenspan appear to support the view that all systems are go when it comes to U.S. economic growth. That's why economically sensitive stocks may grab the spotlight again, particularly as second-quarter earnings season begins soon.

Specialty chemical company Rohm & Haas (ROH Quote) is one example. The company has broad exposure to the very industrial, construction and electronics end markets that are now demonstrating strong vital signs.

Protective Coat

When the company reports its second-quarter results next month, sales could be as robust as they were in the first quarter when they jumped 14%, 7% of which was organic. And with profit improving on higher volumes and a disciplined approach to capital spending, Rohm & Haas is likely to generate strong cash flow this year that will be used to improve its balance sheet and return money to shareholders in the form of a higher dividend.

Rohm & Haas shares already sport an above-average yield of 2.6%. This is likely to give the stock strong support, even though its current valuation of 19 times the consensus earnings estimate of $2.05 per share for this year is above its historical average of 18.

Last week, companies such as Rohm & Haas got a big lift from numerous sources that lent support to the argument that the industrial sector was on solid ground. For one thing, during Chairman Greenspan's testimony before Congress, he sounded unequivocally optimistic about the prospect for continued economic growth.

This was further supported by data such as that for industrial production, which jumped 1.1% in May, the biggest monthly increase in six years and an acceleration from the 0.8% rise in April. The May level was the first time the index had clawed its way back above its prior peak in June 2000.