NewMarket Corporation: Surprisingly Strong Start Of The Year Despite Expensive Acquisition

Core Insights - NewMarket (NYSE:NEU) is a holding company with subsidiaries Afton Chemical and Ethyl Corp., focusing on petroleum additives and specialty materials [1][4][17] - The company recently acquired AMPAC for approximately $700 million, which has impacted its financial results, particularly in the specialty materials division [4][5][17] Financial Performance - In Q1 2024, NewMarket reported total revenue of $697 million, a decrease of just under 1% year-over-year, while gross profit increased by over 9% to just over $216 million [11][16] - Operating profit in the petroleum additives division was nearly $151 million, contrasting with a negative operating profit of $5 million in the specialty materials division [7][11] - The company generated underlying free cash flow of $110 million, with a reported operating cash flow of approximately $124 million after accounting for working capital investments [4][8] Debt and Cash Flow - As of the end of Q1 2024, NewMarket had $117 million in cash and $1.28 billion in gross debt, resulting in a net debt level of $1.16 billion, up from $531 million at the end of the previous year [4][14] - The company anticipates ending the year with a net debt of less than $1 billion and a debt ratio closer to 1.5 times EBITDA, which is in line with its internal targets [14][19] Acquisition Impact - The AMPAC acquisition contributed to an operating loss in the specialty materials division, attributed to non-recurring items and transaction-related expenses [5][17] - NewMarket expects improved results from the specialty materials division in the upcoming quarters, aligning with pre-acquisition expectations [17] Earnings and Valuation - Net income for Q1 2024 was $107.7 million, reflecting an increase of over 10% compared to the same quarter last year, resulting in earnings per share of $11.23 [16][19] - The stock is currently trading at about 9.5 times projected full-year EBITDA of $625 million, with expectations for this multiple to decrease as debt is repaid and the AMPAC acquisition begins to contribute positively [19]