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TWST: Give us some stock picks for this current investment climate.

Mr. Sikka: I love to invest in turnarounds and hairy situations. It’s exhilarating to find situations where the market throws off the baby with the bath water. My first pick is a turnaround in the healthcare services industry.

TWST: Would you give us yet another stock?

Mr. Sikka: The fourth stock is a chemical company, Solutia (NYSE:SOI). 2000 was a difficult year for the company. Through the first nine months, the raw material price increases alone cost the company $160 million. They were able to offset 40% of this amount through pass-throughs. In addition, the weak euro has had significant negative financial impact. These are macroeconomic factors that are beyond management’s control.
I like the company because of the restructuring that they’re going through. The company has shifted from being a net acquiror to being a net seller of businesses. I met with management twice in the last six months. The message has been clear and consistent that there are no sacred cows; the company is going to divest any business that doesn’t fit the overall strategy. The company is pursuing a portfolio pruning strategy. And this year alone, they have, through joint ventures and asset sales, generated over $200 million in cash that they’ve used to pay down debt and buy back shares.
The company is in three main businesses:performance films, integrated nylon and specialty pharmaceutical services. Performance films is the company’s crown jewel and the Saflex film is the marquee product within the films business. Solutia is the largest producer in the world of polyvinyl butyral (PVB). PVB is a plastic interlayer used to improve the safety and resistance of glass in automobiles and buildings. Solutia sells its interlayer in the auto market for windshields under the Saflex name. Saflex is designed in 11 cars today and the company recently announced that it’s going to be designed in three new North American models for 2003. In addition, a large opportunity exists, if Saflex gets designed into the side and rear windows of cars. Further, the company is working on penetrating the residential market for Saflex.
The second business, which the management is trying to grow, is the specialty pharmaceutical services business. In this business, they provide services in the research and the development process to the biotechs and the pharmaceutical companies. They had only $30 million in revenues this year from this business; however, they plan to double the revenues by next year through organic growth and by continued acquisitions.
The third business is the integrated nylon, which had sales of approximately $1.5 billion in 1999 and represents 55% of Solutia’s total sales. The major producers in the nylon fiber industry are Solutia, DuPont (NYSE:DD), BASF (NYSE:BF) and Honeywell (NYSE:HON). Solutia’s integrated nylon business consists of two product lines, nylon carpet and intermediates. Solutia is one of the major players in the staple nylon and has become a cost and quality leader. In the intermediates business, the company ends up using 70% of its production, while the remaining 30% is sold in the merchant market and is used in carpet fibers, solvents and food products.