Should You Buy It: Albemarle Offers Growth at a Good Price

AlbemarleALB shares fell more than 9% Tuesday -- their biggest drop in eight years -- after the specialty chemicals maker posted disappointing fourth-quarter results Monday evening.

The company makes a wide range of specialty chemicals, including flame retardants, curatives and even bulk ibuprofen. Albemarle also sells to a wide range of industries, including plastics, pharmaceutical and energy companies.

Albermarle earned 60 cents a share, which was down from 65 cents a year ago, but a penny ahead of the consensus analyst estimate. Revenue rose 2.5% from the previous year to $599.2 million, but fell $12 million short of expectations.

Operating profits in two of Albemarle's three segments fell more than 20% year over year because of steep increases in the cost of raw materials. The company said on the conference call that higher input prices cut 60 cents a share from 2007 earnings, and could have a similar impact in the new year.

Despite these concerns, the company has received two analyst upgrades since the quarterly report. Still, at Wednesday's closing price of $35.60, the stock is a dozen points lower than where Albemarle was trading last September.

At current levels, the stock is trading at just 13 times expected 2008 earnings of $2.74 a share. This is a discount to the 14% earnings growth the company is expected to post this year, and would mark the fifth straight year that Albemarle has delivered double-digit profit improvement.

One of my prime responsibilities here at TheStreet.com is to run The Value Investor, which includes value stocks in a model portfolio. As part of that service, I routinely examine stocks for our subscribers and lend my analysis to whether the stock is a buy or not. (Click here for a free trial of The Value Investor.)

So let's take a look at Albermarle: Should you buy it? Will Albemarle's profits continue to be crimped from high commodity costs, or does the stock offer investors growth at a reasonable price?

The one division where the company saw year-over-year profit growth in the fourth quarter was the Catalysts unit, which makes chemicals that help refine base materials into specialty products; it accounts for about 40% of total revenue. One of these products is a hydroprocessing catalyst that removes sulfur from heavy crude oil, making it more desirable (and expensive) light sweet crude.

Albemarle has been steadily ramping up its capacity in this area and has a new plant coming on line in the first quarter. Management also should benefit from rising prices in this business, as several big contracts signed in 2006 will come up for renewal this year.

Albermarle also said on the conference call that demand has been positive across the board in early 2008. Albemarle said that U.S. sales have not exhibited any material cyclical weakness, and that growth in the Middle East and Asia should more than offset any domestic slowdown. The company generates just about 35% of its total sales in the U.S., making Albemarle a major beneficiary of continued weakness in the dollar.

It's also worth noting that the company has a strong balance sheet with a manageable 25% debt-to-total-capital ratio. Management also returns cash to shareholders through its 10.5-cent quarterly dividend (1.2% yield) and a steady buyback program that saw Albemarle repurchase $101 million worth of its stock in 2007.

Despite the risk of rising input costs, Albemarle still should be able to generate strong organic growth in 2008 because of improved pricing and the ramp in its production of hydroprocessing catalyst. In the meantime, the company is more resilient to a slowdown in U.S. demand because of its large overseas presence and diverse end-markets.

With that in mind, the stock offers investors solid growth prospects at an intriguing price, and I believe the shares can trade back up toward the low-$40's over the coming quarters.

Albermarle is not included in TheStreet.com Value Investor portfolio. David Peltier writes about value stocks such as MerckMRK, AT&TT and Merrill LynchMER for The Street.com Value investor.