Amazing Grace, if those shares would perk up

Sleekened company tells its story to stockholders


May 11, 2000|By Kristine Henry | Kristine Henry,SUN STAFF

Paul J. Norris, head of W.R. Grace & Co., had almost nothing but positive numbers to report yesterday at the Columbia-based company's annual stockholder meeting - until he got to the share price.

The chemical maker's earnings are up, but Grace's baggage is heavy and investors appear to be shy about putting their money into it.

As Norris noted yesterday at the Ten Oaks Ballroom in Clarksville, Grace earned $136 million in 1999 on sales of $1.472 billion - up from a 1998 loss of $183.6 million with virtually the same sales.

"They've been doing very well operationally for the last two years now - ever since Paul Norris came on board," said David Begleiter, an analyst at Credit Suisse First Boston in New York. "This is one of the better-run and better-managed chemical companies in the world."

He credited Norris - who was named president and CEO in late 1998 and chairman in January 1999 - and other managers with streamlining the company and putting into place a Six Sigma productivity program "that is now beginning to result in real cost savings."

Six Sigma is a tool to measure defects in an attempt to make important manufacturing procedures 99.997 percent perfect.

Just four years ago, Grace was a nearly $4 billion worldwide conglomerate with interests in everything from cocoa products to kidney-dialysis centers. But in 1996 it began shedding noncore units and focusing on chemicals.

It is now a sleeker company that reported first-quarter earnings last month of $24.2 million - up 21 percent from the year-earlier period - on sales of $365 million.

While things are improving operationally, Grace - the subject of the John Travolta film "A Civil Action" - is now dealing with a slew of lawsuits related to asbestos products. Until 1984, the company sold Zonolite Attic Insulation that contained asbestos, and several class action lawsuits have been filed by property owners who used it.

The Seattle Post-Intelligencer ran a series of damaging articles in November reporting that nearly 200 people died from diseases associated with a Grace vermiculite mine, which contains high levels of asbestos, in Libby, Mont. The company stopped its operations there in 1990.

Grace has promised to pay Libby residents' medical expenses. It also told the Environmental Protection Agency that it will clean up the vermiculite mines, although it has declined to sign an agreement with the EPA because company officials say they would be signing away all their future rights.

Begleiter said the company's potential asbestos liability of about $380 million is keeping the stock price low.

"When you look at the size of their market cap, which is just under $1 billion, the liability is fairly large relative to the size of the company," he said, adding that Grace is doing a good job of defending itself and that the liability worries tend to be overblown.

He thinks the shares should be trading in the high teens or low 20s.

Shares dipped as low as $9.50 in March, although they have risen since then, closing yesterday at $13.625, up 12.5 cents.

"We have tried to aggressively communicate that, No. 1, the performance of our platforms is very good - cash flow is increasing, so liabilities become a smaller and smaller component of our cash requirement," Norris said after the meeting. "No. 2, the liabilities are manageable over time and we have a plan to pay down the liability substantially over the next two to three years."

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