Analysis on Olin Corporation

Topics: Free cash flow, Cash flow, Inventory Pages: 11 (3754 words) Published: February 8, 2012
The Analysis and Valuation of

Olin Corporation (OLN)

By Elizabeth Demmon

Submitted on December 13, 2011

SUMMARY1
BACKGROUND1
Industry and company1
Chlor Alkali1
Winchester2
Management and Ownership3
Recent developments3
FINANCIAL ANALYSIS3
Discussion of financial statements3
Discussion of financial ratios4
OUTLOOK AND FORECAST4
Economy4
Industry5
Company5
Investment thesis5
Important value drivers5
Risks, caveats, and exposures6
VALUATION7
Summary of important series7
Selected growth rates7
Components of weighted average cost of capital (WACC)7
Free cash flows and economic profit7
BIBLIOGRAPHY9

SUMMARY
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...

Bibliography: "10-Year Treasury Constant Maturity Rate (DGS10)." FRED - St. Louis Fed. 01 Nov. 2011. <http://research.stlouisfed.org/fred2/series/DGS10>.
"CMAI Completes 2011 World Chlor-Alkali Analysis." PR Newswire, 16 Nov. 2010. 08 Dec. 2011. <http://www.prnewswire.com/news-releases/cmai-completes-2011-world-chlor-alkali-analysis-108421214.html>.
"Consumer Price Index for All Urban Consumers: All Items (CPIAUCSL)." FRED - St. Louis Fed. 01 Nov. 2011. <http://research.stlouisfed.org/fred2/series/CPIAUCSL>.
"Gross Domestic Product (GDPA)." FRED - St. Louis Fed. 01 Nov. 2011. <http://research.stlouisfed.org/fred2/series/GDPA?cid=106>.
"Guns and Ammunition Stores Industry Market Research Report Now Available from IBISWorld." PRWeb, 15 Nov. 2011. 08 Dec. 2011. <http://www.prweb.com/releases/2011/11/prweb8964940.htm>.
Koller, Tim, Marc Goedhart, and David Wessels. Valuation. 5th Edition. Hoboken, New Jersey: John Wiley & Sons, Inc., 2010.
Olin Corporation. “2006 Annual Report.” Clayton, MO, 2006, 71.
Olin Corporation. “2007 Annual Report.” Clayton, MO, 2007, 20.
Olin Corporation. “2010 Annual Report.” Clayton, MO, 2010, 2,5,7-8.
Olin Corporation. “Quarterly Report.” Clayton, MO, 30 Sept, 2011, 8.
Rupp, Joseph D
Yahoo! Finance – Key Statistics. Yahoo! Finance. 10 Dec. 2011. <http://finance.yahoo.com/q/ks?s=OLN+Key+Statistics>
Appendix
[ 2 ]. Olin Corporation. “2010 Annual Report.” Clayton, MO, 2010, 7.
[ 3 ]. Olin Corporation. “2010 Annual Report.” Clayton, MO, 2010, 5.
[ 4 ]. Olin Corporation. “2010 Annual Report.” Clayton, MO, 2010, 8.
[ 6 ]. Yahoo! Finance – Key Statistics. Yahoo! Finance. 10 Dec. 2011.
[ 7 ]
[ 8 ]. Olin Corporation. “2007 Annual Report.” Clayton, MO, 2007, 20.
[ 9 ]. Rupp, Joseph D. “Olin Corporation Shareholder Letter.” Clayton, MO, 2010, 1.
[ 10 ]. FRED - St. Louis Fed. 01 Nov. 2011. .
[ 11 ]. Koller, Tim, Marc Goedhart, and David Wessels. Valuation. 5th Edition. Hoboken, New Jersey: John Wiley & Sons, Inc., 2010. p238.
[ 12 ]. "CMAI Completes 2011 World Chlor-Alkali Analysis." PR Newswire, 16 Nov. 2010. 08 Dec. 2011. .
[ 13 ]. "Guns and Ammunition Stores Industry Market Research Report Now Available from IBISWorld." PRWeb, 15 Nov. 2011. 08 Dec. 2011. .
[ 14 ]. Acme United Corporation. “2010 Annual Report.” Fairfield, CT, 2010, 32.
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