Georgia Gulf Corp. (GGC) recorded a net income of $27.9 million or $0.80 per diluted share, compared to a net income of $4.2 million or $0.12 per diluted share during the comparable quarter in 2007.
The company overpaid for Royal Plastics, an acquisition that 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. GGC is expected to report losses in the near term on the back of rising feedstock and energy costs.
Demand for the company's products is also expected to remain weak due to the downturn in the U.S. housing and auto markets. Moreover, the company may need to sell its assets to comply with the debt covenants. As a result, we have a Sell rating with a target of $2.00.
The PVC and phenol business segments are under pressure due to capacity increases. GGC saw high production cost due to volatile energy prices. The company was unable to recover costs by increasing prices of its products. Prices for Natural gas (the key input) are increasing which is negating the impact of product price increases. This has compressed margins for the company.
Natural gas prices are expected to rise, stemming from strong US consumption, low inventory, and limited drilling activity. Georgia Gulf's end markets are primarily housing related. Until housing market conditions improve, it will be difficult for Georgia Gulf to grow profitability and reduce debt.
On July 15, Georgia Gulf will pay $2.9 million to dismiss a case brought by Sandelman Partners LP, which claimed Georgia Gulf defaulted on some of its debt.
Read the full analyst report on GGC
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