Name: NewMarket Corporation (NEU)
Web Site: http://www.newmarket.com
Brief Description: NewMarket Corporation through its subsidiaries, Afton Chemical Corporation and Ethyl Corporation, develops, manufactures, blends, and delivers chemical additives that enhance the performance of petroleum products. From custom-formulated chemical blends to market-general additive components, the NewMarket family of companies provides the world with the technology to make fuels burn cleaner, engines run smoother and machines last longer.

08/07/06 - Coverage initiated with Buy rating and a price target of $75 per share.

ANALYST OPINION: We initiate coverage on NewMarket Corporation with Buy rating.

VALUATION: Based on DCF and P/E valuation we have derived a fair value of $75 per share of NEU (30% above current price).

OUR ESTIMATES:

year end - Dec 31	Revenue	EPS, diluted
FY06	$1.27 Bn	$2.95
FY07	$1.48 Bn	$3.90

HIGHLIGHTS:

Accelerating double-digit revenue growth since 2003 driven by both price and shipment increases.

• Revenue growth rate increased from 15.2% yoy reported for 2003 to 23.7% yoy for H1FY06.
• Both price and shipment increases fueled the revenue growth.
• Growth witnessed for both US and international sales.

• While gross margin declined continuously from 2003 to 2005 as well as operating profit from TEL marketing agreements, the operating margin oscillated around 6.8% for the period. The offsetting factor was reduction in all operating expenses as % of sales.
• During H1FY06, operating margin improved by 2% pts yoy because of gross margin recovery and further decline of operating expenses as % of sales.
• Normalized net profit margin grew steadily during the last five years as a result of continuous decline of interest expense and favorable operating margin trend.

Gradually improving balance sheet
NEU is continuously reducing its indebtedness level and also reports improvements in management of current assets.
           
Strong operating cash flow
Strong bottom line trend associated with good management of non-cash operating items helped NEU to increase operating cash flow by 74% yoy in FY05 and 109% yoy in H1FY06.

Diversified business portfolio
NEU produces diversified range of products in the growing market of petroleum additives. NEU is one of the largest global producers of lubricant additives offering the broadest line of fuel additives worldwide. NEU is geographically diversified marketing its products in the United States (an increasing share of 35-39% during 2003-2005), Canada (share dipped under 10% mark in 2004) and other geographic regions (ranging between 53-55% during 2003-2005).

Demanded products and recognized brands
Produced by the company lubricant and fuel additives are necessary components for efficient maintenance and reliable operation of all vehicles and machinery. The demand for most company products is driven by such continuously growing factors as the number of vehicles, machinery and fuel using equipment produced as well as intensity and period they are used.  

Marketing strengths 
NEU’s products are marketed worldwide through four unique and recognized brand names. NEU has developed long-term relationships with its customers in every major region of the world, which it serves through five manufacturing facilities in North America and Europe.  

Positive growth perspectives
Positive management outlook is based on expectation of continued growth of petroleum additives market combined with slow-down of raw materials price increase. Besides, the company introduces into the market cost effective products and pays significant attention to improving manufacturing efficiencies. NEU management foresees that the company will be able to generate increasing revenues which will provide the basis for company expansion.

Expansion focused strategy
The company plans to combine internal resources with acquisition strategy to accelerate growth. These plans consider management forecasts that NEU will continue generating free cash flow of approximately $40-50 million. Recently NEU demonstrated its ability to use internal resources for growth having embarked on the project which will result in over 20% detergent capacity expansion by 2007. The industry environment is characterized as favorable for acquisition strategy.

Positive sentiment supported by large insider buys.
During February-August 2006, NEU's Chairman, BRUCE C. GOTTWALD brought in open market over one million shares of NEU.

RISKS:

Technological innovations
The demand for the company products is negatively influenced by continuous technological innovations. Changes of operational parameters of engines and equipment as a result of these innovations lead decreases in demand for NEU products.

Macroeconomic conditions. Slowing down of GDP/industrial production growth can reduce rates of demand growth for certain NEU products. Some of the company competitors such as Lubrisol and BASF have grater financial and operational strengths to withstand these changes.    

Changes in regulations
Use of fuel additives can be subject to regulations connected with dynamics of oil prices. Higher oil and as a consequence gasoline prices lead to relaxing of regulations concerning obligatory use of fuel additives. Besides, the company operations are subject to multiple environmental regulations and strict environmental control.

Increase of raw material prices
The company uses variety of raw materials such as base oil, polyisobutylene, maleic anhydride, olefin copolymers, antioxidants, alcohols, and methacrylates, which can be subject to unexpected prices shocks causing significant squeeze of operational profitability. Increase of oil prices can also cause reduction in consumption of fuel and fuel additives.  

Foreign operations risk
In 2005, net sales to customers outside North America accounted for approximately 5% of the NEU total net sales. The company does business in all major regions of the world, some of which do not have stable economies or governments. In particular, it sells and market products in countries experiencing political and economic instability in the Middle East, Asia Pacific, and Latin America. These international operations are subject to international business risks

Contact: research@gempick.com