Innospec Offers More Upside On Growth And Margins

The last year or so has been a choppy one for Innospec (IOSP), as volumes and price/mix have been choppy across the business and the company absorbs the lower-margin business it acquired from Huntsman (HUN) at the end of December 2016. As far as peer comparisons go, Innospec is a tricky stock to benchmark given its mix of businesses, but I’d call its performance since October of 2016 “middle of the pack,” with companies like NewMarket (NEU) and Solvay (OTCPK:SOLVY) doing worse and companies like Ecolab (ECL), BASF (OTCQX:BASFY) and Lonza (OTCPK:LZAGY) doing better.

Looking ahead, I believe it will be quite a while before the electric vehicle revolution materially impacts the fuel specialties business, and I think the company has a long growth runway for its performance chemicals business. Its oilfield chemicals business should continue to benefit from improving U.S. onshore activity, while the octane additives business will continue to exist in a regulatory twilight zone.

If Innospec can generate mid-single-digit revenue growth and drive FCF margins back toward 10% on sustained improvements in the performance and oilfield chemical businesses, a fair value in the low-to-mid $70s seems reasonable and can support a long position today.

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Innospec Offers More Upside On Growth And Margins