Here's Why Loop Capital 'Begrudgingly' Downgraded Ingevity

Ingevity Corp NGVT, a manufacturer of specialty chemicals and high performance carbon materials, reported its preliminary fourth quarter results on Feb. 20 that were "strong" and "encouraging" but warrants a downgrade, according to Loop Capital.

The Analyst

Loop Capital Markets' Chris Kapsch downgraded Ingevity's stock from Buy to Hold with a price target boosted from $80 to $83.

The Thesis

Ingevity's fourth quarter solidified the company's ongoing strength and momentum, but the stock's valuation prompted Kapsch to "begrudgingly" downgrade the stock, Kapsh said in a note.

Ingevity's management said during its investor day presentation it could have more than $1.5 billion in excess capital that can be returned to shareholders, according to Kapsch. This is unlikely to boost the stock higher, however, as the benefit of significant buyback programs initiated by small-cap companies like Ingevity typically results in a shrinking float and less liquidity, thereby "undermining the investment appeal for a broader audience."

Ingevity's stock is unlikely to see notable upside from the acquisition of Georgia Pacific's pine chems division as it will likely be endorsed "literally any day," the analyst said. Kapsch's estimates already factors in a March 31 closing date and could contribute $105 to $110 million in annualized revenue starting in the second quarter.

Ingevity's stock has gained 50 percent gain over the past year and traded above the analyst's prior $80 price target. This creates a more balanced risk-reward profile over the near-term even though there are no changes to the compelling fundamental story.

Price Action

Shares of Ingevity lost more than 4 percent Tuesday to trade around $77.49.

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