RBC Downgrades Olin Corp., Says Risk-Reward Has Turned Negative

Olin Corporation OLN's businesses are headed for a slowdown going forward, according to RBC Capital Markets. 

The Analyst

Analyst Arun Viswanathan downgraded Olin Corp. shares from Outperform to Sector Perform and lowered the price target from $38 to $34.

The Thesis

Although there is likely to be some upside found across Olin's businesses, the risk currently outweighs the reward, Viswanathan said in a Monday note. The analyst attributed the view to the potential for volatility across Olin's primary businesses.

Viswanathan named four reasons for RBC's move to the sidelines:

• A belief that caustic prices are beyond mid-cycle.
• Volatile ethylene dichloride prices.
• Limited upside forecast for epoxy prices.
• Continued underperformance in the Winchester ammunition business, which fetched 11 percent of revenue. 

An improving supply of caustic soda following seasonally strong chloride demand and moderating international prices are expected to act as near-term headwinds, Viswanathan said. The analyst projects that Olin's longer-term upside will be capped by new supply announcements or switches from soda ash.

Global operating rates in the high 70s and a likely improvement of a few hundred basis points over the next five years are unlikely to lead to a recovery in the EDC market in the next one to two years, the analyst said.

RBC expects the large turnaround at Freeport, Texas, to act as a $40 million to $50 million tailwind for the epoxy segment, but sees cost inflation and potential volatility in upstream as offsetting the benefit. 

Despite the Winchester business performing strongly in the 2013-2016 period, the firm said the company is unlikely to replicate this level of outperformance over the next two to three years. 

The Price Action

Olin shares were sliding 3.16 percent to $32.02 before the close Monday. 

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Photo courtesy of Winchester.