Cash Coating Helps Rohm & Haas

Likewise, capacity utilization rose to 77.8%, its highest level in three years, from an upwardly revised level of 77.1% in April. And industrial production at high-tech-related industries grew 3.5% in May to levels that are 30% above last year. This is particularly important to Rohm & Haas, because nearly 20% of its sales are tied to electronics.

In fact, the news on the electronics front just keeps getting better for Rohm & Haas. According to a recent story in the Taipei Times, global chip sales are expected to rise 24% this year -- the first year that all major applications for chips will experience growth since 1999. Earlier this month, Intel (INTC Quote) said that its second-quarter sales were likely to come in at the high end of its original forecast, and the book-to-bill ratio for North American toolmakers was 1.11 last month, indicating that orders are coming in at a healthy level above sales.

Rohm & Haas has a leading position in materials used in printed wiring board assembly, semiconductor manufacturing and packaging and finishing. According to a recent presentation to investors, Rohm & Haas' sales into those markets have increased at an 11.7% compound annual rate since 1995, compared with nearly 8% for the market overall. And its profit margins in this segment are among its highest as well: In the first quarter, electronic materials produced an EBITDA margin of 21%, compared with the companywide margin of 17%.

Weak Spots

But a number of troublesome issues are likely to emerge during second-quarter conference calls with chemical companies such as Rohm & Haas. For one thing, oil prices remain stubbornly high, and the gap between Rohm & Haas' raw material costs and the prices it charges probably widened quite a bit in the second quarter from the $14 million difference reported in the first quarter.

Second, with the debate over the sustainability of China's economic growth raging on Wall Street, many may question Rohm & Haas' outlook for the region. Rohm and Haas has been particularly aggressive in establishing a foothold in the Asia Pacific region, and it now has 10 technical centers located there, second only to North America. Last year, Asia Pacific, mainly China, accounted for 17% of total sales.

So while the shares' current valuation may not be that enticing, concern over oil prices or China could cause a pullback to more reasonable levels in the mid-$30s. But with such strong free cash flow (roughly $575 million forecast for this year) and the likelihood of a dividend boost, it's hard to see them getting much lower than that.