Breaking the Mold

 | Jan 10, 2013 | 11:00 AM EST  | Comments
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After healthcare, the materials sector is the best performing sector, year-to-date. While we are only a few days into the 2013 -- and there is plenty of time for things to change -- I decided to look at the best performing subsector: specialty chemicals. The materials sector is the backwater of the S&P 500, since its only 5% of the index, but when the materials sector is working, you should take a look. This group leads any economic recovery.

Perhaps the best performing stock in the sector is PolyOne (POL), which is probably remembered for being one of the few public plastics companies in America. While it still make plastics, the company has been working hard to transform itself into one of the better-run specialty plastics companies.

Companies that make plastic are highly cyclical and many investors don't have the stomach for the group. PolyOne is locked into a highly competitive global marketplace. The company provides plastics to every industry imaginable and supplies. The company supplies dozens of industries, including: appliances, construction, electronics, healthcare, industrial, packaging, textiles and transportation. In the past, the business was so competitive that profits were hard to find. But over the last six years, the company has transformed itself into a leading maker of specialty plastics. The company has aggressively moved into manufacturing high performance plastics such as the types that used in the healthcare field. Management has even announced more environmentally friendly products.  

In 2005, specialty plastic accounted for about 2% of operating income. Today, that number has increased to 46% and the company has a goal of earning 70% of its operating income from specialty plastics by 2015. By focusing on the highly profitable part of the business, the company believes it can grow revenues from $2.9 billion in fiscal 2011 to $5 billion by 2015. In terms of earnings, the company believes it can achieve a 25% compounded annualized growth rate as it approaches $2.50 in earnings per share.

To see how far it has come, just look back to 2006 when the specialty business had a 1.5% operating margin. Now the business is sporting an almost 10% operating margin.

For fiscal 2012, the Street consensus estimate is revenue of $2.97 billion and $3.34 billion in 2013. If the company were able to grow revenue 12%, that would translate into a 30% year-over-year increase in pre-tax profits, or about $1.36 per share.

The materials sector is highly leveraged to a global economic recovery and PolyOne is leading the charge in the specialty chemical space.

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