Why We Love Pigments And Coatings

The Beautiful Market

In the words of Jerry Maguire "we work in a business of tough competitors" and that makes it hard for investors to find sustainable returns on invested capital (ROIC). Companies like Amazon keep everyone on edge.

A few years ago I was just pondering products that are important and can be differentiated AND account for only a small % of the cost of the final good. Paint came to me right away and more generally coatings. You might spend millions on the end product and the paint and coatings would be only a few percentage points.

In addition, the labor required to apply paint is considerable and often greater than the cost of the material. That's yet another reason to insist on quality and be fairly price insensitive - at least for professional jobs.

These types of structural economics are good for investors and they can be great during periods of growth and expansion. The ability to increase units and raise prices is an ROIC elixir. Initially this brought us to Valspar (VAL) and Sherwin-Williams (SHW). They both performed well and then SHW acquired VAL to make it a giant in the space.

Venator the Company

That brings us to Venator (VNTR) which is doing an IPO to spin off from Huntsman (HUN). Venator is a $2B (sales) maker of Titanium Dioxide (TiO2) and "performance additives." TiO2 is the key ingredient in paint and is used in a variety of other end markets.

Consolidation has been underway in the market which has gone from a dozen global suppliers to five. These companies are all competing but the last thing they want is a price war. TiO2 prices have been recovering steadily during the last 18 months and remain below where they were in 2014.

While TiO2 prices were low in 2015 Venator went through a restructuring and embarked on a program to streamline the business and reduce their cost base. As a result, their profit margins are already double what they were when TiO2 prices were higher. Thus the company is poised to enjoy robust profit growth as TiO2 prices remain firm and volumes continue to grow with GDP.

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Disclosure: We do not have any vested interest in the shares of this stock at the time of writing and publication. We may however take a position post publication and are not under any obligation to ...

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