W.R. Grace & Co. (GRA) is generating Street enthusiasm with attractive returns on capital, solid free cash flow and the potential to benefit from a cyclical construction recovery, yet the stock may be overestimated when it comes to possible liabilities associated with bankruptcy emergence, says Chris Kapsch, Analyst at Topeka Capital Markets.
“There’s been a tremendous amount of enthusiasm for W.R. Grace stock in anticipation of its impending emergence from bankruptcy. The company is well-managed, it’s well-run, boasts attractive returns on capital and generates good free cash flow. However, our more cautious view, versus the rest of the Street, is based a couple of considerations. One is valuation; we think the stock is currently richly valued when you factor in the pro forma, postemergence liabilities associated with the emergence process,” Kapsch said.
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GRA‘s construction chemicals business is set to benefit from recovery in the residential and nonresidential markets, however Kapsch believes expectation for the company’s catalyst business will need to reach normalization before he becomes more positive on the stock.
“We believe expectations will have to be reduced, primarily a function of the company’s catalyst business having effectively overearned in the 2011, 2012 time frame, during which they benefited from the pass-through mechanism associated with rare earth mineral surcharges. So we think that there has to be somewhat of a normalization in the profitability expectations for that business before I become more enthusiastic on W.R. Grace shares,” Kapsch said.
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