KeyBanc Downgrades KMG Chemicals On Valuation, Says 'The Future Is Not Without Some Uncertainty'

Shares of KMG Chemicals, Inc. KMG, a global supplier of specialty chemicals and performance products, have gained around 50 percent since late November 2017, which led KeyBanc Capital Markets to downgrade the stock. 

The Analyst

Analyst Michael Sison downgraded KMG Chemicals from Overweight to Sector Weight with no assigned price target.

The Thesis

KMG Chemicals' earnings report Monday sent shares above Sison's prior $75 price target, and the equity is now trading at a fair valuation, the analyst said in the downgrade note. KMG Chemicals' multiple of 12x on 2019E EV/EBITDA represents a premium to the average peer group multiple of 10x, the analyst said. (See Sison's track record here.)

The stock's strong performance since the analyst initiated coverage in November is warranted, as the company succeeded in transforming to a "higher-quality chemical company," Sison said. Looking forward, the competitive landscape has intensified and the electronic chemicals business faces tougher year-over-year comparisons with MSI growth decelerating, the analyst said.

KMG Chemicals will likely maintain its above-average market growth and continue showing margin improvements, but the "future is not without some uncertainty, Sison said. 

Price Action

Shares of KMG Chemicals were trading lower by 0.62 percent at the time of publication Wednesday. 

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