UPDATE: KeyBanc Upgrades OM Group to Buy, Names $34 PT

In a report published Wednesday, KeyBanc upgraded its rating on OM Group

from Hold to Buy, and named a $34.00 price target. KeyBanc noted, “The announced sale of OM Group, Inc.'s (OMG-NYSE) Advanced Materials business should be viewed as a material step change in the way shares will trade and be valued by investors going forward, in our view. The drag of falling cobalt prices, and thus lower earnings, along with exposure to regions such as the Congo should no longer hinder the stock's trading multiple. The sharp move higher in OMG shares since the announcement signifies the beginning of the “re-rating” its shares will experience over the coming months, in our opinion. We also point to the sustained strong share performance of companies in our space that recently executed notable portfolio changes for the better, even after the initial positive stock reaction; recent examples include PPG Industries, Inc. (PPG-NYSE), Ashland Inc. (ASH-NYSE), Cytec Industries Inc. (CYT-NYSE), Chemtura Corporation (CHMT-NYSE), HB Fuller Company (FULNYSE), and PolyOne Corporation (POL-NYSE). The proceeds from the sale should restore OMG's balance sheet to a net-cash position. The Company plans to use this cash to repurchase up to $50 million of its shares in addition to paying down a significant portion of its outstanding debt. The remaining businesses, which are heavily exposed to Europe, along with end markets related to industrial production and electronics could benefit from a recovery in these markets as we move through 2013 and 2014. In the near term, the lower interest expense from the debt pay down and a share buy-back should help to partially offset earnings pressure in the existing businesses. In addition to a more constructive investor view of the “new” OMG, downside risk may be moderated due to the pro-forma net-cash balance sheet and potential for small bolt-on acquisitions in its existing businesses. As such, we are raising our rating to BUY from HOLD and establishing a $34 price target.” OM Group closed on Tuesday at $27.70.