Monday, KeyBanc Capital upgraded PolyOne Corp. (POL) shares to Buy from Hold with a price target of $5. The brokerage narrowed its 2009 loss per share estimate to $0.10 from $0.20. The brokerage raised its 2010 EPS estimate to $0.35 from $0.30.
Analyst Saul Ludwig noted that PolyOne will report second quarter of 2009 results on August 6. Following surprisingly strong results from both Spartech Corp. (SEH) and A. Schulman, Inc. (SHLM) on better than expected margins and improved liquidity, second quarter of 2009 results at POL could come in better than his estimate of a loss of $0.02 per share and consensus of breakeven.
Given the potential for a positive earnings surprise and the recent improving data on new home building, the analyst believes the shares should move higher following the second quarter release. For the first time in several years, the analyst upgraded the stock to Buy. The analyst's price target is $5, which is 60% up from the current price.
The analyst said that last Friday, the Commerce Department reported the third consecutive month of increases in home building and a strong increase in building permit applications. These good news data points followed last Thursday's report that the home builders sentiment index rose in July to 17 (from 15 in June), the highest level since last September.
The analyst's full-year EPS estimates for 2009 and 2010 are increased modestly on the basis of expected higher gross margins for specialty products, coupled with cost control initiatives.
The analyst noted that although POL may have a positive earnings surprise, it does not likely have clear sailing from this point forward. Volume declines will likely be daunting for the next several quarters, pricing could face pressure and overall earnings may still be modestly in the red for 2009.
The analyst said that even though the housing market may be at its nadir, overall sales to this end market will still likely be drastically down, and sales into the transportation market could also see significant pressure. It is POL's large exposure to housing that looms as its greatest risk, in the analyst's view.
Currently, POL is up $0.26 or 8.44% and trading at $3.34.
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