Wednesday, KeyBanc Capital downgraded OM Group Inc. (OMG) shares to Underweight from Hold with a price target of $15. The brokerage lowered its 2008 EPS estimate to $4.60 from $5.05, and its 2009 estimate to $0.80 from $2.50.
Analyst Saul Ludwig noted that during fourth quarter of 2008, cobalt prices moved from $29/lb in October to $16/lb in November to about $11/lb in December, making the fourth quarter of 2008 average price $17/lb. Given the precipitous drop, the analyst now estimates fourth quarter of 2008 EPS for OMG at a loss of $0.18, bringing his revised 2008 EPS estimate to $4.60.
Using a cobalt price of $11/lb (vs. $21/lb previously) for 2009, the analyst's EPS estimate is cut to $0.80 from $2.50. The analyst again cautions that cobalt prices are highly volatile with swings that can be large and swift; therefore, his new 2009 EPS estimate of $0.80 should be viewed with a high degree of skepticism and with the expectation that frequent EPS revisions are possible as cobalt prices change.
The analyst reiterated that each $1.00/lb change in the price of cobalt can impact annual EPS by $0.15-$0.20. A wild card in the analyst's fourth quarter of 2008 estimate is the amount, if any, OMG may write down its inventory as it applies the "lower of cost or market" criteria to its inventory valuation. The analyst has estimated a $7.0 million mark-to-market adjustment in the fourth quarter, but have no firm basis for making a specific estimate.
While OMG's balance sheet appears pristine with $200 million in year-end cash, minimal debt and $1.15 billion in equity, the analyst sees no catalyst to drive the shares higher in the near term. With losses expected in fourth quarter of 2008 and first quarter of 2009 and very low EPS expected in 2009, the analyst sees more downside risk than upside potential at this time.
Currently, OMG is down $0.70 or 3.16% and trading at $21.45.
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