Cytec Industries (CYT, Financial) is a global specialty materials and chemicals company focused on developing, manufacturing and selling value-added products. The company's products are used in a diverse range of end markets including aerospace and industrial materials, mining and plastics. This article discusses why Cytec Industries can deliver strong growth and robust shareholder returns over the next few years.
Global diversification
Cytec Industries sales are well diversified geographically, and this reduces the overall revenue risk. As of December 2013, 48% of the company’s sales came from North America, 31% from Europe, 13% from Asia Pacific and 8% from Latin America.
Going forward, I see a greater shift of revenue and growth towards Latin America and Asia Pacific as these regions will see relatively high growth in the industries that the company serves.
The company’s revenue is also well diversified in terms of segments with 50% of the revenue coming from aerospace materials, 20% from in-process separation, 16% from industrial metals and 14% additive technologies.
Revenue diversification, both regional and in terms of segments, is the first positive factor to consider with Cytec Industries. Providing service to a diverse range of industries lowers the revenue concentration risk.
Big opportunity in aerospace
As mentioned above, 50% of the company’s revenue comes from the aerospace segment and therefore the segment is a key revenue driver for the company.
There is a big growth potential in the aerospace segment as the chart below shows the commercial jet backlog.
A strong backlog of commercial jets is important for Cytec Industries because there is a greater shift in composite usage in aircraft manufacture in order to reduce weight and improve fuel efficiency.
This is a big positive for Cytec Industries and can result in strong order inflow from companies like Boeing (BA, Financial) that has a strong commercial jet order backlog to be executed over the next few years.
I am therefore positive on this segment of the company and the aerospace materials segment is likely to be the single largest growth driver for the company.
Stock is undervalued
Another important reason for considering Cytec Industries as a good buy is the point that the stock is undervalued. Analyst estimates suggest that Cytec Industries is likely to grow (earnings growth) at a strong pace of 25.88% in 2014 and a moderate pace of 9.3% in 2015. This means that the stock is currently trading at 14.6 times 2014 earnings and 13.4 times 2015 earnings.
These valuations are attractive and the stock is trading at a 5-year forward PEG ratio of 0.76, which backs my point that the stock is undervalued.
With good growth prospects and with growth prospects to get better when China recovers, Cytec Industries is certainly a stock to consider. Besides the attractive valuation factor, Cytec Industries also offers a dividend yield of 1.1% and I believe that the company’s dividend payout will also increase as strong growth comes from the aerospace materials segment.
Strong fundamentals and growth
As of 2Q14, Cytec Industries had strong fundamentals and the company was on track to make strong growth related investments.
For the second quarter of 2014, Cytec Industries had a cash balance of $140 million and the company generated $105 million in operating cash flow for the first half of 2014 as compared to an negative operating cash flow of $6 million for the first half of 2013.
A strong operating cash flow is important as the company intends to make a capital expenditure of $180-$200 million for the year and strong cash flows will help in funding the growth.
Further, an investment of nearly $200 million will translate into revenue growth and cash flow growth going forward and is also indicative of the bullish view of the management related to the company’s growth going forward.
Conclusion
Not just in the aerospace industry, Cytec Industries also has growth potential in the automotive industry with the demand for lower vehicle weight being the key growth driver. Over the next few years, Cytec Industries is expected to grow at a strong pace and I believe that the company can be a long-term value creator.
Between the period 2013 to 2018, the company intends to increase its EPS at a CAGR of 16% and this indicates the company’s bullish view on the industries it is providing its products and services. With a strong long-term growth potential and exposure to high growth markets, Cytec Industries is a stock to own for the next 5 years.
