According to a filing with the SEC, Glenn Simmons, who serves on the Board of Directors at Kronos Worldwide, Inc. (NYSE:KRO) purchased 5,000 shares of the specialty chemicals company on January 19th at prices of about $19.20 per share. Simmons now owns over 48,000 shares of Kronos Worldwide, Inc. directly- so this purchase was a significant percentage increase in his holdings- and his spouse owns an additional 24,000 shares. Simmons was buying shares in November 2012 at prices around $13.30 per share; even though the stock is up 34% in the last three months, he apparently believes that it still has further to rise. See more of his insider trading activity and our history of insider purchases at Kronos. As of this writing, however, the stock price has increased further and is now at about $20 per share, a 4% increase from his most recent buy.
We track both varieties of insider trading, but insider purchases are particularly interesting. This is because insiders may sell for many reasons including diversification, but purchases are more likely to convey an insider’s feelings about the stock. Studies show that on average stocks bought by insiders outperform the market (read more about studies on insider trading).
Kronos Worldwide, Inc. is primarily a producer of titanium dioxide, which among other uses is an enhancer of coatings, plastics, and ceramics. Its recent rally reflects a perception that the company is set to recover from a poor 2012; the stock is actually down 8% from a year ago. The most recent data has 32% of the outstanding shares held short, however, so many market players- far from agreeing with Simmons that the stock will keep increasing in price- are in fact bearish. Looking at the company’s fundamentals, Kronos reported a 14% decrease in revenue in the third quarter of 2012 versus a year earlier and earnings were down almost 60%. At its current levels the stock trades at 15 times consensus earnings for 2013- that would be a fair price, with no particular attraction to the long or short side, but of course we wouldn’t take the precise numbers at face value. As a chemicals company, demand tends to be dependent on the broader economy and so the beta is 2.
How does Kronos compare to its peers?
There is a wide variety of publicly traded specialty chemicals companies; we’d pick out Huntsman Corporation (NYSE:HUN), Cabot Corp (NYSE:CBT), HB Fuller Co (NYSE:FUL), and PolyOne Corporation (NYSE:POL) as an appropriate peer group. Kronos’s 2013 P/E of 15, which seemed reasonable in absolute terms, turns out to be a bit pricier than most of these companies. PolyOne is an exception at 17 times expected earnings, though that company reported an 11% rise in net income in its most recent quarterly report versus a year earlier. HB Fuller has earnings multiples in the teens as well.
Huntsman and Cabot are somewhat more conventional value stocks at least in terms of pricing. Trailing and forward P/E multiples are less than 10 in each case, with PEG ratios of 1 or lower. Now, these stocks are highly correlated with market indices with betas of about 2, and their recent financial performance has not been particularly strong (very weak revenue growth at Cabot, and a moderate decline in sales at Huntsman) but they seem to be less complicated cases than Kronos and possibly better places to start looking for value.
Of course, Kronos could outperform analyst expectations and the insider purchase suggests that Simmons expects it to, but we doubt that it’s wise to depend on that particularly with such a strong outcry on the short side. Huntsman and Cabot are at least worth considering in our view although we would want to see some signs that their businesses are stabilizing. Growth isn’t necessary in those cases but continued decline might leave them overvalued even at their currently low multiples.
