H.B. Fuller's margins and stock rebound

H.B. Fuller Co. has spent the past year climbing back from a fall it and other companies tied to industrial and construction markets suffered when the economy went into a tailspin late in 2008.

The markets H.B. Fuller serves -- construction, packaging and durable goods -- have hardly been robust, but the company has been adept at grabbing business from competitors. H.B. Fuller has a long tradition of innovation aimed at helping customers build better products, sometimes at lower cost. A couple of recent examples are a new adhesive used in the manufacture of synthetic turf that dramatically improves customer efficiencies and another new adhesive for envelope manufacturing that improves product quality while increasing customers' production efficiencies.

H.B. Fuller also has benefited in the past year from lower raw-material costs, which helped boost its gross margin to 31.2 percent in the fourth quarter compared with 24.9 percent for the same period in fiscal 2008.

The Vadnais Heights-based maker of paints, adhesives and specialty chemicals finished its fiscal year ended Nov. 28 with net income of $24.6 million or 50 cents a share on sales of $341.6 million. It was the third consecutive quarter-to-quarter gain in revenue and earnings, and both beat Wall Street's estimates.

Investors have taken notice. H.B. Fuller's stock price, which had tumbled to below $10 a share in March 2009, has climbed back up to the low $20s, closing at $22.65 Friday. That's still slightly lower than the price throughout most of 2008, but the stock has outperformed many of its peers. H.B. Fuller stock has appreciated more than 12 percent in the past two years, in contrast to the 14 percent decline in the Standard & Poor's materials index, whose members include chemical, paper, steel and timber companies.

Expecting good things

Analysts expect continued improvement in H.B. Fuller's bottom line when the company reports first-quarter results next week. Their consensus estimate is 27 cents a share, up from a severely depressed 14 cents a share in fiscal 2009. The company hasn't provided specific guidance but has said it believes its pipeline of new business can help it continue to outperform the market in sales this year.

But there's some concern that prices of H.B. Fuller's petroleum- and natural gas-derived raw materials could start rising again, biting into profit margins. The company has said it expects slight raw material price increases this year.

Whether H.B. Fuller would be able to pass on any price increases is difficult to forecast in part because the adhesives and sealants businesses have so many competitors.

There's also considerable uncertainty over whether the industries H.B. Fuller serves will continue to recover. McGraw-Hill Construction last week reported increases in residential building activity in February but a decline in commercial construction.

The uncertain outlook may be why some analysts appear to believe H.B. Fuller's stock is fully valued, even though they give the company high marks for reformulating some products in order to use less-costly raw material components and for making some canny investments in sales, marketing and technical services.

Jeffrey Zekauskas of J.P. Morgan is more bullish and has put a $25 target price on the stock. "H.B. Fuller is a reasonably valued, high free-cash-flow generating company with good longer-term prospects," he wrote in January. He's recommending a buy on the stock, while the five other analysts following the company have hold recommendations, according to Bloomberg News.

Expanding internationally

Two key acquisitions in the past year have boosted H.B. Fuller's presence in foreign markets, which last year had higher sales growth than the United States. In 2009 it acquired Nordic Adhesives, a German developer and manufacturer of flexible packaging adhesives.

And earlier this month it said it had agreed to acquire Revertex Finewaters Shd Bhd in Malaysia, a leading adhesive supplier with a well-developed export network throughout Southeast Asia, including Thailand, Indonesia, Philippines, Vietnam, and Singapore. The transaction is expected to close during the second quarter.

Susan Feyder • 612-673-1723