Weighing NewMarket's Profile Risks

To stay ahead in this market, the company makes a notable investment in research and development. In 2006 it invested $70 million for R&D, and development and improvement of products appears to be key to NewMarket's long-term strategy.

The Financials

Since it is difficult to accurately predict long-term growth trends for this industry, ratio analysis seems most appropriate for valuing this company. It trades at a forward price-to-earnings ratio (P/E) of roughly 11.

When comparing NewMarket with its competitors, I used the enterprise value/EBITDA multiple. This metric is similar to P/E, but it can be used more effectively when comparing companies of varying debt structures. According to Yahoo! Finance, NewMarket currently trades around a 6.7 trailing EBITDA multiple.

This is lower than the 8.6 multiple of its competitor Lubrizol(LZ Quote) but higher than that of BASF(BASFY Quote). Looking at the information on the BASF Web site, I calculated its EBITA multiple as just above 5.

Looking at the return on equity, NewMarket seems to be good at generating value for shareholders. In recent years, the ROE has improved, and for 2006 it was 19.1%.

I tried to relate ROE to the cost of capital (financial jargon for the opportunity cost of an investment). The company recently issued senior notes at 7.125%. Adding a risk premium of about 4%-5% would give us a cost of capital in the low teens. Because the ROE is above the cost of capital, it implies that NewMarket has the potential to generate profitability for shareholders.