Valvoline To Benefit From Share Gains, IT Investments, Jefferies Says In Bullish Initiation

The chemical sector is benefiting from a long industrial cycle, while the valuation multiples of the stocks are weighed down by the risk of an impending recession, according to Jefferies. 

The Analyst

Analyst Laurence Alexander initiated coverage of Valvoline Inc VVV with a Buy rating and $27 price target.

The analyst initiated Lithium Americas Corp LAC with a Buy rating and $6 price target.

Sociedad Quimica y Minera de Chile SQM was initiated with a Hold rating and $51 price target.

The Thesis

Rising oil prices, better Chinese demand trends and a potential inventory restock cycle next spring are likely to support the chemical sector, Alexander said in the Wednesday initiation note. (See his track record here.)

Leading indicators for earnings power in the chemical sector remain robust, the analyst said. 

Alexander said he expects key leading indicators — particularly for U.S. housing and corporate borrowing conditions — to turn negative by next summer, suggesting late-cycle dynamics.

In cyclicals, the analyst favors relative value and strong balance sheets. Alexander recommends diversification into late-cycle businesses such as industrial gases, cycles distinct from the industrial cycle or companies that are less cyclical than the broader sector.

Valvoline has successfully navigated a rising raw material environment, a key concern for investors post-spinoff, according to Jefferies. The firm expects share gains and IT investments to support around 8-percent sales CAGR and a 14-percent EBITDA CAGR through 2020 for Valvoline. 

"The shares trade at 9.8x 2019E EBITDA, a 45-percent discount to less-cyclical consumer-facing comparables," Alexander said. 

The Price Action

Valvoline shares have pulled back about 14 percent year-to-date.

Related Links:

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The Long-Term View On Lithium

Photo courtesy of Valvoline.