Ferro Corporation (FOE): Can a New Board Fix This Chemical Maker?

Chemical maker Ferro Corporation (NYSE:FOE)’s mix of businesses has struggled to find momentum over the past five years, with declining sales and a sharply lower stock price. Management has been reluctant to change course, believing the sum was worth more than the parts. Two investment firms have criticized the company’s strategy, leading them to launch a successful proxy battle for board seats. Fearing a potential change in control, the company has finally focused on shareholder value, agreeing to sell two non-core business units earlier this year. So, is there an investment angle here?

What’s the value?

Founded in 1919, Ferro is a specialized chemical maker with worldwide leadership in the manufacturing of glazes and enamels for a wide variety of applications, including ceramic tile, appliances, and autos. The company also produces electronic materials that improve the conductive efficiency of technology devices. However, the rapid pace of change in this latter segment, especially in the solar-manufacturing arena, has led to weak overall financial results for Ferro Corporation (NYSE:FOE).

In its latest fiscal year, Ferro reported fairly dismal financial results, with an 18% decline in total sales and an adjusted operating loss. While sales in its performance-coatings business held up well, sale volumes and prices were sharply lower in its electronic-materials business amid large declines in precious metal raw-material prices. Given Ferro Corporation (NYSE:FOE)’s heavy fixed-cost structure, though, the downdraft in sales led to red ink in the company’s bottom line.

A way forward

Ferro is certainly in a bind since its unprofitable operations don’t provide sufficient funds to improve its weak financial position. While the company has previously used asset divestitures to lower debt, one-time asset sales are not a viable long-term strategy and won’t lead to necessary gains in operating cash flow. To compete with the industry giants, Ferro Corporation (NYSE:FOE) really needs to partner with a competitor to generate meaningful operating synergies.

Fellow chemical manufacturer A. Schulman Inc (NASDAQ:SHLM) is certainly open to a business combination, already announcing an offer to acquire Ferro for $6.50 per share, or roughly $530 million. A tie-up between the two small specialty chemical producers would create a more diversified company capable of withstanding the industry’s business cycles, with leading products in the glazes, color concentrates, and high-performance plastic components areas. It would also provide more solid financial footing for Ferro Corporation (NYSE:FOE), given Schulman’s conservative use of debt.

In FY 2013, A. Schulman Inc (NASDAQ:SHLM) reported mixed financial results, with a 4.9% increase in total sales but an 18.1% decline in operating income. While the company achieved higher sales during the period due in part to 2012 acquisitions, its gross profit was hurt by price weakness in its specialty powder segment.

In response, management has embarked on cost-savings initiatives, including closing duplicate facilities and re-focusing on higher value technical-product lines.  A. Schulman Inc (NASDAQ:SHLM)’s proactive strategy should allow the company to maintain solid profitability while it pursues growth avenues such as engineered plastic for the medical device and 3D-printing industries.