Longbow Downgrades Olin To Underperform Amid Several Factors

"[W]e see risk of underperformance in 3Q16 and lower guidance for 4Q16, as well as at least a year's delay in realizing mid-cycle profitability levels, which we now expect to be achieved no sooner than 2020," analyst Dmitry Silversteyn wrote in a note.

The analyst sees third-quarter results to the bottom of management's EBITDA and EPS range, or $220 million and $0.34 (excluding special items) respectively, implying a miss versus consensus expectations. The fourth-quarter guidance also likely to fall short of Street forecasts.

Silversteyn sees a high likelihood of fourth-quarter guidance being lowered toward the bottom of or below the current annual EBITDA range of $840 million–$900 million.

Related Link: Olin Declares 359th Consecutive Quarterly Dividend

The analyst noted that the July chlor-alkali industry utilization rate of 87 percent comes in significantly below the 90 percent from last year, "suggesting peak rates are still insufficient to drive sustainable price increases in ECU." This puts management's 2016 EBITDA guidance at risk.

Olin derives 54 percent of its sales from the chlor-alkali products and vinyls division, while 33 percent of corporate sales are represented by the epoxy division.

"[W]e see risk to two thirds of OLN's portfolio, with potential negatives from EDC and other chloro-organics, lower demand and prices for HCl and lower bleach sales adding to potential miss probability," Silversteyn highlighted.

In addition, renewed epoxy pricing declines seen in the third quarter are in opposition of management's expectations and suggest profitability for epoxy will remain close to break-even levels for the second half.

As such, Silversteyn cut his EPS estimates for third quarter/fourth quarter/2016 to $0.34/$0.15/$1.06 from $0.40/$0.18/$1.15. The consensus estimate calls for EPS of $0.42, $0.24 and $0.88, respectively. The company sees EPS of $0.34 -$0.44 for the third quarter.

At time of writing, shares of Olin fell 5.07 percent to $20.65, while the analyst has a price target of $17.