Street Calls of the Week
On Friday, Deutsche Bank adjusted its outlook on shares of Quaker Chemical Corporation (NYSE:KWR), reducing its price target to $190 from the previous $225, while reaffirming a Buy rating on the stock. This adjustment follows Quaker Chemical's second-quarter earnings release, which saw the company's EBITDA fall short of expectations by 2% and its third-quarter EBITDA guidance come in approximately 5% below consensus.
The company's gross margins increased by 200 basis points year-over-year to 37.9%, marking the eighth consecutive quarter of year-over-year gross margin expansion, thanks to lower raw material costs and improved commercial and operational execution.
However, the margins did not meet the anticipated figure of 38.7%, which was expected to be similar to the first quarter. The miss was attributed to a continued softness in industrial production, particularly in the Americas and EMEA regions.
Despite the lower-than-expected margins, Quaker's second-quarter gross margins remained at the higher end of its long-term target range of 37-38%. Looking forward, Quaker anticipates its third-quarter EBITDA to mirror the second quarter's, driven by modest sequential volume improvements in the Americas, absence of customer outages, and growth in the Asia Pacific region. The company also expects new business wins to help counteract soft market conditions.
While Quaker Chemical did not provide full-year guidance, Deutsche Bank forecasts a modest 4% quarter-over-quarter decline in fourth-quarter EBITDA, an improvement compared to the 9% decline in the same period of the previous year. The bank highlights Quaker's business model, which is characterized by its service intensity, customer intimacy, and asset-light approach, as being well-suited to achieve above-market sales growth and gross margin expansion.
Moreover, the bank notes the company's resilience to recession, given that raw materials account for 85% of its cost of goods sold and that 75% of its selling, general, and administrative expenses are variable. The valuation is also deemed attractive at 10.5 times the estimated 2024 EBITDA, compared to 21.6 times for its service-intensive peer Ecolab (NYSE:ECL), which holds a Hold rating.
InvestingPro Insights
In light of Deutsche Bank's adjusted outlook on Quaker Chemical Corporation, it's worth considering additional insights that may influence investor perspectives. According to InvestingPro data, Quaker Chemical boasts a market capitalization of $3.02 billion and a P/E ratio of 24.52, which adjusts to 23.01 based on the last twelve months as of Q2 2024. The company's revenue recorded a slight decline of 4.14% over the same period, reflecting the challenges noted in the article.
InvestingPro Tips highlight Quaker Chemical's strong track record of shareholder returns, with the company having raised its dividend for 17 consecutive years and maintained dividend payments for an impressive 52 years. This consistency is an indicator of Quaker's financial stability and commitment to returning value to shareholders.
Moreover, the company's liquid assets surpassing short-term obligations suggest a robust balance sheet, which is crucial during uncertain economic conditions. It is important to note that while four analysts have revised their earnings downwards for the upcoming period, the consensus still predicts the company will be profitable this year, a sentiment that aligns with the positive outlook from Deutsche Bank.
For investors seeking a more comprehensive analysis, there are additional InvestingPro Tips available on Quaker Chemical Corporation's profile at InvestingPro. These tips delve deeper into the company's financial health and market position, offering valuable insights for those considering an investment in Quaker Chemical.
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