A 'Compelling Buying Opportunity' In The Kraton Corp. Sell-Off

Kraton Corp KRA reported fourth-quarter results Tuesday that sent shares tumbling lower by 15 percent the next day — creating a "compelling buying opportunity," according to Loop Capital Markets. 

The Analyst

Loop Capital Markets' Chris Kapsch maintains a Buy rating on Kraton's stock with an unchanged $70 price target, but the estimates and price target are under review, he said. 

The Thesis

Kraton delivered a top-and-bottom line beat in its Q4 earnings report, but guided its full fiscal 2018 adjusted EBITDA to approximately $400 million, Kapsch said in a Thursday note.

The guidance "obviously served as a disappointment," but a 15-percent decline in the stock is "overly punitive," especially at a time when the Pine Chemicals industry is showing continued signs of improvement and any issues with the polymer segment are transitory, he said. 

Kraton's EBITDA guidance could prove to be conservative, and investors who are looking for "gaudy growth rates should look elsewhere," Kapsch said.

Kapsch's under-review $70 price target is based on a 8.5-9x multiple — versus an average multiple of 9.5x from 2010 to 2015 — on his 2018 EBITDA estimate of $407 million minus net debt of $1.6 billion. The under-review estimate adds an expected EV credit for one year's worth of expected free cash flow.

Price Action

Kraton shares were up 1.53 percent at $43.76 at the time of publication Thursday afternoon. 

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