My issue with Olin Corporation (OLN) is, to me, as an investment I think the stock is a value trap, pure and simple.

At the surface the stock appears to be under valued. It isn't until you take a closer look that you realize here is a company that spent $4.6 billion purchasing the chlorine business from Dow Chemical in FY 2015 and yet for FY2017, 72% of the company's net income came from taxes.

I have to admit these are the things that make a value investor consider becoming a greeter at an unnamed big box store. But don't take my word for it, see what you think.

Olin Corporation

Olin Corporation operates in three divisions, Chlor Alkali Products, Chemical Distribution and Winchester Products. Chlor Alkali Products manufactures and sells chlorine and caustic soda, hydrochloric acid, hydrogen, bleach products and potassium hydroxide. Chemical Distribution manufactures bleach products and distributes caustic soda, bleach products, potassium hydroxide and hydrochloric acid. Winchester products include sporting ammunition, reloading components, small caliber military ammunition and components, and industrial cartridges. Industry peers include PolyOne Corporation, NL Industries, and Huntsman Corporation.

Short-Term Value
My short-term (3-6 week hold) target price for the stock is $34.99, with an initial trailing stop at $32.83. Upward price movement will find resistance at $33.89 and $34.85, with final resistance at $36.53, while downward price movement will find support at $30.77 and $29.58.

The Tax Act
The Tax Cuts and Jobs Act of 2017 makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) requiring companies to pay a one-time deemed repatriation transition tax (the “Transition Tax”) on certain earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (“AMT”) and changing how AMT credits can be realized; (6) capital expensing; (7) eliminating the deduction on U.S. manufacturing activities; and (8) creating new limitations on deductible interest expense and executive compensation.

The Securities Exchange Commission staff issued Staff Accounting Bulletin (“SAB”) 118 which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete.

To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

It is important to note that income tax adjustments applied to repatriated earnings and deferred taxes, may distort a companies earnings and consequently its fair value.

In the case of Olin Corporation, the company has not completed its accounting for the tax effects of the 2017 Tax Act. However, the company has made provisional estimates and will make any required adjustments as additional information becomes available. Based on the company’s initial analysis of the 2017 Tax Act, they recognized a provisional deferred tax benefit of $437.9 million.

The impact of the 2017 Tax Act includes: (1) a provisional $315.8 million deferred tax benefit to reflect the reduction of the U.S. corporate tax rate from 35% to 21% and (2) a provisional $122.1 million deferred tax benefit to reflect an estimated reduction of $162.6 million in their deferred tax liability on unremitted foreign earnings partially offset by an estimate of the one-time transition tax of $40.5 million.

Insider Transactions

In the past 12 months, the company recorded 36 insider trades involving 294,090 shares of stock. Of those 36 insider trades, 25 were Buys involving 157,937 shares of stock, and 11 were Sells involving 136,153 shares of stock, creating an insider buy to sell ratio of 1.2 to 1.

Acquisitions

The company acquired KA Steel Chemical in July 2012 for $328 million. In October 2015, the company purchased a Chlorine Business that produces chlor-alkali from Dow Chemical for $4.6 billion.

Growth and Not
There are several year over year growth metrics of interest; revenue growth, free cash flow growth, earnings growth, debt growth, price growth, and finally year to date price growth. For Olin Corporation, revenue grew by 13%, free cash flow grew by 103%, earnings grew by 279%, there were no changes in debt, and the stock price increased by 28%. Year to date the stock price has decreased 6%.

Future Value

My future (5 year hold) target price for the stock is $49, which is an average annual return of 9%. A prior five year hold of the stock (FY2013- FY2017) would have returned an average of 14% per year. Past and future gains are based on actual and anticipated earnings, actual and anticipated dividends, and actual and anticipated price appreciation. Any investment has the potential for loss, and past performance is no guarantee of future results.

Baseline and Fair Value

My baseline valuation for the stock is $24. Baseline valuations are based on free cash flow value, net current asset value, book value, and tangible book value. My current fair value for the stock is $73. The fair value number is my current valuation for a stock based on earnings, earnings growth, and the current 5 year yield of a AAA rated corporate bond. Value investing buy, sell, and close targets are derivatives of fair value.

Fair Warning

Fair warning means that the time for bidding has ended and an exchange is about to be concluded. Olin Corporation (NYSE: OLN) – FYE 12/2017 – The stock is UNDER VALUED and currently trading below my most recent $44 buy target. Please See Linked PDF Worksheet