Friday, March 24, 2006

Koppers spans the globe.

Koppers Holdings Inc, NYSE: (KOP) is one of my favorite stocks. Very few people know about Koppers, but it is one of the most amazing companies on the NYSE, with what I believe are some incredible possibilities for future growth.

Koppers has two main product lines. Koppers is one of the world’s largest producers and refiners of coal tar and they are main suppliers of railway crossties to the US railway industry. Coal tar has never been sexy. To make one pound of aluminum requires half a pound of coal tar. Although the aluminum industry has been trying to find a replacement for coal tar, it has been unsuccessful so far. The newest Alcoa smelters being built in Iceland and Trinidad, are all configured to use coal tar. Global aluminum production has been increasing strongly as China and India have become net importers of aluminum.

Because of higher energy costs a lot of US transportation is shifting towards railroads which are therefore increasing their capital expenditures to handle the increased loads. In 2005 CSX began giving Koppers a large amount of crossties to treat with creosote (which Koppers makes from coal tar); in 2006 CSX will be buying back the treated crossties. Higher oil prices will also increase profits forKoppers' pthalic anhydride business.

Koppers is a very recent IPO (Feb 1, 2006)but the company dates back to 1912, and was previously listed on the NYSE. In 1988 there was a very acrimonious and successful hostile takeover of the company. The management of the coal tar and wood treating operations was then sold out to the old Koppers management. Various shenanigans with private equity funding ensued, and in 2006 the company went public. In the years before the IPO, the private equity folks, saddled the company with an enormous amount of debt which was used to pay dividends to themselves. This is a sad trend among recent IPO's that companies take on debt and then use the IPO to pay that debt off.

This debt burden is something that potential investors need to be aware of. Koppers current credit rating is junk, but it should improve as the financial ratios are improving. This will probably lead to the company refinancing some of current debt which has very high interest rates on it. The IPO proceeds are being used to retire about $100 million worth of debt, which should lower interest expense by $10 million. Another issue is that Koppers is involved or will so be involved in fairly large number ofclass action lawsuits involving alleged pollution from the company’s former activities.

The management team at Koppers is very experienced, and has a very large amount of insider holdings. The company has decided to pay a dividend of $0.68 a share, which gives the shares about a 3.7% yield. Untill about two weeks ago, there was no analyst coverage of KOP, now there are five analysts covering the company, the average recommendation is hold (BSH 1/4/0) and price target is $20.60. Predicted earnings from Starmine are $1.01 for FY 2006 and $1.17 for FY2007. KOP is also recommended by Jim Cramer on his most recent Mad Money show, as being a good indirect play on railroads.

My personal price target is $25 or so, and I think that this is a stock for the longrun. Koppers products are essential to the US and world economies and the company has a leading position in its markets. It is very unlikely for any new competators to enter this market. (Full disclosure; I own shares of Koppers)

As a haiku in the Koppers corporate brochure notes:

Europe to Asia
And to North America
Koppers spans the globe