Georgia Gulf Corp. (GGC) overpaid for Royal Plastics, a supplier of housing products. The acquisition was entirely financed with debt, and the company is in danger of violating debt covenants. The remaining product lines of the company are suffering from over capacity. Rising feedstock and energy costs, coupled with weak demand for the company's products aggravated net losses in the first quarter of 2008.
Going forward, demand for GGC's products is expected to remain weak due to the downturn in the US housing and auto markets, as the company's end markets are primarily housing related. As a result, we have a Sell rating with a target of $3.50. Until housing market conditions improve, it will be difficult for Georgia Gulf to achieve profitability growth and debt reduction.
The PVC and phenol business segments are under pressure due to capacity increases. Prices for Natural gas increased more than 25% in the first quarter negating the impact of product price increases. This compressed margins for the quarter. Natural gas prices are expected to rise further. On June 10, Fitch Ratings downgraded the ratings of Georgia Gulf. These ratings affect approximately $1.5 billion of debt. The Ratings Outlook remains negative.
Read the full analyst report on GGC
Get real-time market insights and profitable stock recommendations from the team of analysts at Zacks Equity Research. See all todays Analyst Blog entries on Zacks.com.