Less than a month after a buyout offer from a private equity firm, paint pigment maker Tronox Holdings (NYSE: TROX) is holding steady near its 10-day moving average.
In mid-September, the Stamford, Connecticut company reportedly hired advisors to evaluate a $4.3 billion all-cash offer from private equity firm Apollo Global Management.
Apollo has been active in forming private equity funds, buying both public and private companies, and buying business units from other companies.
That $4.3 billion equates to $27 per share. Tronox closed Wednesday at $24.74, down $0.20 or 0.80%.
There's been no further news since the offer was made, but that's not unusual. These buyout negotiations are typically secretive, as the company can't do anything that could further affect the stock price.
Shares vaulted 11.05% on September 13, as news outlets reported the Apollo offer. Trading volume was more than 1100 times the average.
A stock that could be acquired could mean fast profits for investors. At this juncture, there's a little bit of wiggle room between the current price and the potential buyout price. So there's possibly some room to pocket gains if the deal goes through.
But what happens if Tronox rejects Apollo's offer?
There is clearly potential in the company if Apollo identified it as a buyout candidate.
Tronox manufactures titanium dioxide pigment, as well as other chemicals for paper, plastics, and paints. The company mines and processes titanium ore, zircon, and other materials used in its manufacturing processes.
The company has been profitable in each of the past three years. Earnings and revenue declined in the second and third quarters of 2020, as manufacturing capacity worldwide slowed.
However, sales and profitability bounced back in the fourth quarter of last year, with growth in both areas accelerating in the past two quarters.
Wall Street expects earnings per share of $2.24 for the full year, and $2.52 next year, a gain of another 13%.
Tronox is due to report its third-quarter on October 27 after the close. Analysts are eyeing income of $0.67 per share on revenue of $905.27 million. Both would be significant gains from the year-ago quarter.
According to MarketBeat earnings data, Tronox topped analysts' views in the past two quarters.
Analysts have a "buy" rating on the stock with a price target of $27.33, representing a 10.48% upside.
Two days after the Apollo offer, JPMorgan Chase increased its price target from $26 to $30, and boosted its rating from buy to overweight.
The company has some strong three-year growth metrics:
- Revenue 17.55%
- Operating Income 25.09%
- Return on Assets 17.71%
- Return on Equity 81.85%
- Return on Invested Capital 25.19%
- Net Margin 31.53%
There was more good news in the company's second-quarter report in late July.
- The company generated a record $150 million in free cash flow after investing $60 million in capital expenditures.
- It continued deleveraging with debt repayments of $135 million in the second quarter and $70 million completed in July for a total of $205 million, reducing total debt to $2.8 billion.
The board declared a quarterly dividend of $0.10 per share, an increase of $0.02 per share, equating to a $0.40 per share annual dividend.
Of course Tronox, like essentially every company on the planet, is experiencing some type of supply-chain issues.
In the quarterly earnings call, co-CEO John Romano addressed the challenges, saying, "We think the entire supply chain with regards to inventory is below what we refer to as seasonal norms. And our ability to build inventory between now and the end of the year and meet customer demand with all the challenges that are going on is going to be difficult."
He added, "This has absolutely nothing to do with demand ... [D]emand will continue to be pent-up and will likely elongate this cycle. We have a lot of requests from customers for additional volume. I don't think Tronox is on an island with the transportation issues that are going on in the industry right now."
So is this stock a buy right now? It's at an interesting inflection point where a decision to buy could be considered speculation, because it's unknown whether the Apollo deal will go through.
If it doesn't, the stock may tumble on the news, but the fundamentals and business case remain strong enough for Tronox to be considered a strong growth name.
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