The Analysis and Valuation of
Olin Corporation (OLN)
By Elizabeth Demmon
Submitted on December 13, 2011
Industry and company
Management and Ownership
Discussion of financial statements
Discussion of financial ratios
OUTLOOK AND FORECAST
Important value drivers
Risks, caveats, and exposures
Summary of important series
Selected growth rates
Components of weighted average cost of capital (WACC)
Free cash flows and economic profit
As a student analyst for Drake University’s Krause Challenge Fund, I have conducted a financial analysis and valuation of Olin Corporation, a producer of Chlor Alkali products and Winchester ammunition. Olin has recently undergone restructuring and acquired the other half of a previously owned subsidiary, which I expect to reduce operating costs. The current market price undervalues the company. Therefore, I suggest we purchase Olin for our portfolio. The following is the detailed results of my analysis. BACKGROUND
Industry and company
Olin Corporation is the manufacturer of two major segments: Chlor Alkali products and Winchester ammunition. The company has been around for over 100 years and is a major market participant within North America. Headquartered in Clayton, MO, Olin has multiple manufacturing facilities with the United States and one location in Canada. Chlor Alkali
Olin is the third largest producer of Chlor Alkali products and the largest producer of industrial bleach in North America according to data from Chemical Market Associates, Inc.. Chlorine and caustic soda are the co-products Olin produces in fixed ratios called Electrochemical Units (ECU) through the electrolysis of salt. Both chlorine and caustic soda are used in the production of bleach. A complete list of end-products can be found on page 30 of the appendix. Competitive environment
Chlor Alkali industry is a commodity business with product differentiation largely based on price. Manufacturing is very capital intensive, which does create some financial barriers to entry. The two largest manufacturers, DowChemical and OxyChem use most of their products to manufacture other downstream products. Olin differentiates itself from competitors by focusing the merchant market. Sales and growth
This is a cyclical industry. This cyclicality arises because supply is limited by the physical capacity of manufacturing facilities and ability to sell the co-product. Given these are commodity products, prices are very responsive to changes in supply and demand. Timing capacity growth with the cycle leads to a growth in sales. Demand for end-products ultimately drives demand for Chlor Alkali. The energy advantage North America has by using natural gas instead of crude oil has grown exports of end-products. Customers
Most of sales are to the merchant market. The company is able to capture a greater share of the merchant chlorine market than its overall share of the market capacity because it focuses on the merchant market instead of using the products in downstream production. Costs and Suppliers
Almost 50% of production costs is raw materials. The two major needs are electricity and salt. Electricity comes from coal, hydroelectric, natural gas and nuclear power. Regulatory
Olin must comply with legislation regarding the environment, such as air, water and land quality, which requires capital expenditures and increases operation costs. The company has programs in place to minimize waste and prevent pollution. Legislation was passed in October 2009 surrounding the use of mercury cell technology, but expired without enactment. This would have increased the costs of operating mercury cell capacity, of which Olin has one facility. Since it is uncertain whether something similar...
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