Deutsche Initiates Coverage On Nexeo With A Buy Rating

Deutsche Bank has started coverage of Nexeo Solutions Inc NXEO (the newly combined company is comprised of the previously separate WL Ross Holding Corp WLRH and Nexeo Solutions Holdings, LLC) with a Buy rating and $11 price target, saying that the company could achieve above-industry growth over the long term from its well-established chemical and plastics distribution platform.

The brokerage said chemical and plastics distribution is a fragmented and emerging industry, with roughly 50 percent of industry production volume/sales up for grabs for third-party distributors, which service only about 10 percent of industry sales currently.

"In addition to favorable industry consolidation dynamics, our thesis is also predicated on Nexeo's ability to expand margins via mix improvement and scale," analyst Karen Lau wrote in a note.

Related Link: Nexeo Solutions Announces Third Fiscal Quarter Earnings Results

Nexeo's trailing 12-month adjusted EBITDA margins stood at 5.2 percent, compared to Univar's 6.7 percent and Brenntag's 7.8 percent.

Lau acknowledged that it is disappointing that the company reduced its full-year guidance at its first earnings release as a public company.

The company's FY17 adjusted EBITDA outlook arguably still appears aggressive, implying about 20 percent growth year-over-year organically, a tall order in current environment.

Lau expects Nexeo's share price to remain volatile until the company shows improved operational and guidance track record.

"That said, we believe NXEO at current price levels offers favorable risk/reward and presents an attractive entry point to capture potential longer-term upside from portfolio improvement and industry consolidation," Lau noted.

At the time of writing, shares of Nexeo were up 1.93 percent to $9.00.