Volume Growth, Pricing To Benefit HB Fuller; Longbow Upgrades

HB Fuller Co FUL could be a beneficiary of better-than-expected demand in the adhesives and sealants industry, helping the company to go ahead with its pricing actions without any undue loss of customers, an analyst at Longbow Research said.

The Analyst

Longbow's Dmitry Silversteyn upgraded HB Fuller from Neutral to Buy, with a 12-month price target of $60, offering 25 percent upside from current levels.

The Thesis

Specifically, volume growth for adhesives could be in mid-single digits in the first quarter, Silversteyn said in a note, citing contacts. The analyst expects similar growth for the remainder of 2018, resulting in better incremental margins for the company in 2018.

Going by the stronger overall demand, less competition from China and uniform responses of higher prices, the analyst expects better volumes and higher prices for HB Fuller in 2018.

"Above-consensus volume growth and higher prices can lead to EBITDA that surprises to the upside vs. consensus and puts F2020 target of 17% EBITDA within reach, supporting if not expanding current multiples and driving material stock price appreciation," the analyst said.

To reflect higher volume and forex expectations, Longbow Research raised its revenue estimates. However, the firm's 2018 first-quarter earnings per share estimate was reduced from 40 cents to 36 cents, given greater near-term RM price pressure, which it expects to abate by mid-2018.

The firm raised its 2018 and 2019 earnings per share estimates from $3.14 and $3.84, respectively to $3.22 and $4.

Price Action

HB Fuller shares are down over 3 percent over the past year.

At time of writing, shares were up 1.7 percent to $48.71.

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