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Chemical Reaction Triggers Value Opportunity

May 1, 2018 | U.S. Equity

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When we identified that an industrial company's shift toward higher-margin, specialty products and internal operational improvement initiatives were driving improvements in the company's return on invested capital (ROIC), we knew we had a compelling investment opportunity.

As explained in another post, we typically look for investment opportunities in one of two categories: quality companies at discount prices or corporate transformation opportunities.

Corporate transformation opportunities are stocks that historically have not executed on the metrics we're looking at, but they look great from a valuation perspective. Many times, however, a corporate event provides an investment opportunity. Often it's a management change, but it could also be an asset sale or a divestiture.

Our screening process uncovered a corporate transformation opportunity in 2008 of an underperforming chemical company that had recently brought in new management.

We were impressed with the new CEO's plan to improve ROIC by shedding unprofitable customers, consolidating plants, selling non-core assets, and shifting the company's focus to higher-margin specialty products.

The successful execution of this vision has translated into a significant increase in ROIC and earnings-per-share growth over time, as the chart below illustrates.

This is a good illustration of how we identify companies and management teams that put a premium on capital stewardship and how that leads to increased shareholder value over time. Look for another post about our team's focus on capital stewardship.

Mark Leslie, CFA, partner, is a portfolio manager on William Blair's U.S. Value Equity team.