Olin is Our Growth Stock of the Week

Olin Corporation (OLN) manufactures and sells a variety of chemicals and chemical-based products. The company has 3 segments: Chlor alkali products; Vinyls, which generates the majority of revenue and includes products like chlorine and caustic soda; and Winchester which sells sporting ammunition and ammunition accessories. 

The stock has been a major outperformer in 2021 with a YTD gain of more than 150%. Following the pandemic, industrial activity has been stronger than expected, benefitting chemical companies and prices. 

The chemicals made by OLN are used by industries all across the economy which means the company will benefit from the recent uptick in growth. It’s also benefiting from inflation as OLN’s chemicals are essential inputs for so many necessary and important items which means it has considerable pricing power.

Usually, chemical companies are not considered growth stocks, but OLN is an exception. In today’s article, I want to dig into why its growth outlook is so attractive and why the stock has even more upside in the coming months.

Chemical Activity Barometer

One of the most useful, stealth economic indicators is the chemical activity barometer, which is compiled and tracked by the American Chemistry Council. It measures sales and production levels of the chemical industry and is considered a leading indicator for industrial production given that chemicals are typically used early in the supply chain.

Currently, this series is quite strong and in 2021 has been making new highs for much of the year. Even more impressive this is happening while many industries are not operating at full capacity due to supply chain constraints. The chemical activity barometer is a leading indicator but the second derivatives of growth are even more bullish such as new orders and inventories. 

Growth

This obviously means that macro conditions for chemical companies like OLN are bullish. Strong demand means that pricing power should remain strong in the coming years. We can see this in OLN’s gross margins which have gone from 5.5% to 22.9% over the last year. 

Equally impressive is the company’s record Q3 revenue of $2.4 billion which was a 64% gain from 2020 and a 48% gain from 2019. Over the last 12 months, it’s generated $7.25 in free cash flow per share which is quite impressive given the most free cash flow it generated prior was $3.3 per share in 2018. This growth and margin expansion has resulted in 2022 EPS expectations climbing from $0.50 at the start of the year to its current $8.25.

Value

OLN’s high levels of free cash flow are likely going to lead to dividend hikes from its current 1.8% dividend yield. The company also launched a $1 billion stock buyback program which is particularly significant given that its total market cap is $9.7 billion. 

It’s also remarkable that despite OLN’s earnings growth and gains in stock price, it remains quite cheap with a forward P/E of 7.2 which is much less than the S&P 500’s forward P/E of 21.5. It’s a rare opportunity to find a stock with such a low valuation and high levels of earnings growth and margin expansion.

POWR Ratings

OLN has a Buy rating with an overall grade of B in the POWR Ratings system. Its Growth grade of B is well-deserved with expectations of 47% earnings growth next year. 

For the rest of OLN’s component grades such as Momentum, Stability, Sentiment, and Quality, click here. OLN is ranked #7 in the B-rated Chemicals industry. For more top stocks in this highly rated industry, make sure to check out the Industry page.

Conclusion 

The final cherry on top for OLN is that we are in an environment of accelerating growth that should particularly benefit the industrial sector especially following the passage of the infrastructure bill. Two more growth tailwinds are the improving coronavirus situation and improvements in the supply chain issues, constraining industrial production.

For these reasons, I believe that OLN’s stock should continue trending higher for the duration of the current bull market. 

OLN shares fell $0.78 (-1.26%) in premarket trading Wednesday. Year-to-date, OLN has gained 156.35%, versus a 25.80% rise in the benchmark S&P 500 index during the same period.

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.

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