Anyone holding stock in PVC compounder Geon Co. or PET maker/recycler Wellman Inc. in the past year has learned that the stock market can be fickle, if not outright schizophrenic. Geon, an Avon Lake, Ohio, firm with $1.3 billion in sales in 1999, had outperformed its peers in Wall Street's specialty chemicals category, bouncing between $25 and $35 per share for much of 1999.
But in January 2000, things took a turn for the worse, and the stock fell below $20. Though it has rebounded somewhat, it remains well shy of its previous highs — even after the May 8 announcement that it was merging with M.A. Hanna Co., a Cleveland-based resin compounder and distributor, to create a compounding colossus with $3.5 billion in annual sales.
At Wellman, a Shrewsbury, N.J.-based business with 1999 sales of $950 million, the stock price spent 1999 recovering from a mid-1998 tanking that sent it below $10 per share in early 1999, as overcapacity in resin and a weak fibers market took their toll. Since that point, it's climbed all the way back, reaching $22.25 as of May 12.
"Geon's earning performance would argue for better stock performance," said Andy Cash, an analyst with PaineWebber Inc. in New York. "But the market's been concerned about potential interest rate increases and there was some concern about raw material costs.
"Geon's not alone," Cash added. "A lot of specialty chemical companies are undervalued right now."
Wellman's turnaround is a sign that the PET market finally is turning the corner toward profitability after several lean years, according to Keith Phillips, the firm's chief financial officer.
"We're really the only pure PET play on Wall Street," Phillips said. "And if you look at supply and demand, everything's getting tighter and that's led to a significant upswing in earnings. We hit bottom and stopped, and now we're going up.
"We've also got high operating rates," Phillips added. "And that's important because with a billion pounds of PET, each penny [in price] is $10 million in operating revenue."
Wellman has taken some solid steps in the past 18 months to back up its claims of a turnaround.
In June, the firm reduced costs and overhead by $25 million. Some of that amount came through staff reductions. Wellman eliminated 150 positions by closing its wool-processing division in Johnsonville, S.C., and shed 150 jobs in various areas throughout the company.
"Some cost reduction also was achieved through process improvements," Phillips said. "We also consolidated the number of vendors we work with and strengthened relationship with our remaining vendors, resulting in better prices."
Wellman also added 450 million pounds of PET resin capacity at its Pearl River plant in Bienville, Miss.
"We brought new capacity on at a time when the market was turning positive," Phillips said. "We're perceived as a reasonably well-run company in a cyclical business that's on the way up. We're seeing PET demand growth at healthy rates and that's drawing interest from investors as a potential growth market."
John Roberts, a stock analyst with Merrill Lynch & Co. Inc. in New York, agreed that Wellman's capacity addition was well-timed, and added that the company was forced to weather additional challenges before its ongoing stock rebound.
"Wellman had been heavily punished by cheap polyester fiber from Asia," Roberts said. "PET prices were also low, but after many years of depressed pricing, things may be turning around. The basic thinking is that PET is on the mend, but Wellman and other producers have had to deal with the market's love of everything tech."
At Geon, officials were left scratching their heads as they watched their stock begin its dive in January. Dennis Cocco, Geon's vice president of investor relations, outlined the firm's situation in an interview before the Geon/Hanna merger was announced.
"Nobody put out a sell recommendation on us [in January]," Cocco said.
"Our major shareholders didn't abandon us. It was just that money was pouring into technology stocks. We still think we're a good business and a value investment."
Geon had altered its focus since 1998, spinning off its PVC resin assets into the Oxy Vinyls LP joint venture while increasing its PVC compounding capacity and purchasing O'Sullivan Corp., a major PVC film extruder.
The company also found itself in a kind of no man's land on Wall Street, since it wasn't a commodity chemicals company anymore, but did not quite fit the standard profile of a specialty chemicals company, either.
"Geon is really sort of a specialty chemical company now, but it appears the market is valuing them as a commodity chemical company," Merrill Lynch's Roberts said. "They're not getting credit for their transformation."
Geon also has dealt with increasing expectations on Wall Street.
"Equity is a tough market," Cocco said. "People are buying stock and putting it into a mutual fund or a management portfolio, and you're being challenged to do better.
"If you're only getting a 10 percent annual return, people don't want it. `They expect 15-25 percent. There's a move to build money very quickly and it's creating disparities in the market."
Rising PVC prices have not necessarily lifted Geon's sales, since compounders pass on increases at a slower rate than do resin makers.
"It's been somewhat difficult for us to raise prices," Cocco said. "In an environment where inflation has been so low for so many years, people are used to very consistent pricing."
A string of acquisitions — including O'Sullivan and plastisol maker Dennis Chemical Co. — kept Geon's stock price aloft for a while, but when the acquisitions slowed, the stock headed south, according to Roberts.
The downstream move into the film market did not really affect the stock, Cocco said, even though some industry insiders questioned the move at the time.
"Engineering films fit very well into what we're trying to create," he said. "We're compounding PVC, and in that form we can manufacture something. [Film] is a value-added step."
The ups and downs experienced by Geon stock in the past year didn't affect directly its decision to merge with Hanna, Geon officials said.
Talks between the companies began in late 1998. Each company's equity value was affected by its stock prices, but there were stronger reasons for the merger, according to Geon
In wrapping up the pre-merger-announcement interview, Cocco pointed out that Geon's earnings-per-share climbed from 96 cents in 1998 to $2.16 in 1999 — a jump that he said proved the firm was headed in the right direction.
"What's happened to our stock price isn't reflective of Geon, it's reflective of concerns about the market going forward," Cocco said.
"Our stock is still a long-term investment vehicle."
And in spite of the public frenzy that's surrounded the stock market in the past couple of years, business leaders still need to keep their priorities straight, according to Cocco.
"The stock market shouldn't drive your business," he said. "It should be driven by whether you show value to your shareholders."