Innospec Inc.: Fueling up for the road ahead

Innospec Inc. (Nasdaq:IOSP)
Newark, Del.
http://www.innospecinc.com

52-week low / high: $13.40 / $32.45
Shares Outstanding: 23.71million
Market Capitalization: $564.3 million

These days the pain at the pump is only getting worse. Add in the credit crisis, and “fueling up” for most businesses is nothing short of prohibitive. Not Innospec Inc. (Nasdaq:IOSP). This little company is filling up its tank and motoring forward.

The real growth, as of late, is being driven ahead by the developer of fuel additives and chemical’s fuel specialties division, which applies a blend of chemicals used as additives to a wide range of fuels to help improve fuel efficiency, boost engine performance and reduce harmful emissions.

Wondering how the fuel specialties segment is propelling growth? Just look to its end market: multinational oil companies and fuel retailers. Companies in those spaces are running as speculators bid up oil futures and emerging markets’ thirst for oil. The fuel specialties segment saw a 20% increase in sales for 2007.

More recently, growth in the fuel specialties business has been driven by new product development to address key drivers in demand for fuel additives. Such key drivers include legislation, population affluence, and energy price and availability.

Operating income for the fuel specialties segment was $18.6 million in the fourth quarter, more than double the $8.6 million a year ago, which included $6.2 million in expenses for one-time professional fees and a potential customer claim. The segment saw a 39% increase in operating income for 2007 and management is expecting the fuel specialties segment to have another solid year in 2008.

While the fuel specialties business is clearly this company’s core business and a major driver of growth, the company has two other operating segments, active chemicals and octane additives; the active chemicals segment shouldn’t be discounted.

While results for the quarter were somewhat disappointing (operating income was down 70% to $1 million from $1.7 million in the fourth quarter of 2006; gross margin was 16.8%, down from 19.1% a year ago), the company began streamlining the active chemicals business in October to focus on industry sectors, including personal care, household, industrial, plastics and paper as end markets. Its repositioning efforts should build momentum and enable it to deliver improved results in 2008.

The company’s octane business, on the other hand, seems to be running out of gas, as the end market for this segment has experienced a substantial decline in demand. While still profitable, the company expects the diminishing demand trend to continue in 2008. This segment could be a potential hindrance to the small cap if it doesn’t spin it off before the demand well runs dry.

For the fourth quarter ended Dec. 31, 2007, total revenues increased 19% to $172.7 million from $144.7 million in the fourth quarter of 2006. The company posted a net profit of $11.1 million, or $0.45 per share, compared with a net loss of $0.7 million, or $0.03 per share, for the same quarter last year. Results included a goodwill impairment charge, a small restructuring charge and a non-cash charge related to the company's pension plans.

Earnings before interest, taxes, depreciation and amortization bolted 40% in the fourth quarter to $27.3 million from $19.5 million a year ago.

For the full year ended Dec. 31, 2007, revenues were up 13% to $602.4 million from $532.1 million in 2006. Net income spiked 160% to $29.5 million, or $1.19 per share, from $11.4 million, or $0.45 per share, last year.

Although faced with a recession during the first quarter, the stock price has appreciated 69% on account of well-received fourth-quarter earnings since a dip near its 52-week low at the beginning of the year. Let’s see if this company has enough fuel in its tank for the winding road ahead when it reports first-quarter results on April 30. Then investors should have a clearer outlook on Innospec’s prospects for 2008.

Note: Innospec Inc. (Nasdaq:IOSP) is on the "Watch List" of Growth Report, a subscription investment newsletter from Business Financial Publishing, which also publishes SmallCapInvestor.com. As a Watch List company, Innospec displays many characteristics found in successful stock winners, and is being closely monitored for possible inclusion in the Growth Report portfolio at a later date.

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