The Tide Could Turn at Calgon

 | Jan 24, 2013 | 11:00 AM EST  | Comments
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As a recent SEC filing shows, Starboard Value now -- an activist hedge fund managed by Jeffrey Smith -- owns 4.4 million shares of Calgon Carbon (CCC). Calgon, which has a market capitalization of just over $900 million, primarily sells water- and air-treatment products for environmental and industrial purposes, including to food or medical-supply companies. The stock was recently running ahead of the market for the Thursday session, and it currently trades at about $16 per share. This would mean a position of about $70 million for Starboard. Based on that 13F filing, Calgon is one of the fund's five largest positions by market value.

The better-known water-softener and beauty products under the Calgon brand, with the "ancient Chinese secret" and "Calgon, take me away" catchphrases, are now owned by other companies. With Starboard's stake in the company now at 7.7% of total shares outstanding, the fund's management has disclosed that it plans to obtain up to three seats on Calgon's board. The latter has responded by noting that it has met with Starboard and continues to be committed to shareholder value. But we would certainly expect that management to be at least somewhat resistant to any suggestions from Starboard, as the fund has tended to take on an activist role.

In the third quarter of 2012, Calgon reported a 6% decrease in revenue vs. the prior year. Due to these lower sales, higher costs and an $8 million restructuring charge, the company reported operating losses of $4 million, reversing from an $18 million profit a year earlier. Adding back the restructuring charge leaves Calgon profitable, but only barely so. Even as other segments improved, the activated carbon and services segment -- by far the largest source of business, at 89% of operating income -- was what pushed the company into the red. Cash flow from operations, meanwhile, was solid in the first nine months of the year.

In the first half of last year, Calgon earned $0.33 per share. So, if we assume zero earnings per share for the third quarter and then annualize, we get $0.44 per share for a full year, which would represent a price-to-earnings multiple of 37x. Current sell-side expectations are for an $0.80 per-share profit for this year, which makes for a current-year P/E ratio of 20x. Of course, Starboard likely has plans to increase shareholder value above expectations for the current business, but it is not fully clear what those would be or how much value they would create.

Calgon's closest peer is Donaldson (DCI) -- a considerably larger company with a market cap of $5.4 billion. Donaldson has also struggled recently, with revenue down slightly and margins contracting year over year, per its most recent numbers. Its valuation multiples don't put it in value territory, either, particularly for a weakly performing company -- its trailing P/E ratio is 22x. However, Donaldson is cheaper than Calgon, at least in terms of its recent history. Its 2013 estimates are optimistic, but that is dependent on strong improvement, and the third quarter had not been positive.

So investors in Calgon at the current price seem somewhat dependent on Smith encouraging -- or pressuring -- management into a value-creation initiative. With no information on that yet, we would not call the stock a buy. But we will certainly be paying attention to any further developments.

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