Ashland: Still Favored Here

Posted Aug 27th 2010 2:00PM by Joseph Lazzaro
Filed under: Stocks to Buy

If you had a chance to take some profits off the table in May with Ashland Inc. (ASH), first discussed here on May 4, 2009 at a price of $26.43, that proved to be a prudent move, as Ashland was stopped-out at $48 after hitting a spring high near $64.

Still, that means ASH netted a more than $21 gain, good for an 81.6% return. Not bad.

What's more, I still like Ashland at this stage, and would consider a position at current levels. Here's why: Ashland will likely post a 8-10%% revenue gain in 2010, propelled by a stronger performance in all business units, and aided by revenue from the Hercules acquisition.

Ashland makes specialty resins, polymers, and adhesives for sale in North America and Europe. It also owns the Valvoline oil-change brand and oil service chain, and the Zerex anti-freeze brand, among other business operations. Further, to-date demand recovery during the expansion has been better-than-adequate. To be sure, the U.S. economy is flashing danger signs -- with GDP growth slowing to 1.6% in the second quarter -- but the conclusion here is that it's too early to ratchet-down revenue/earnings expectations.

The First Call FY2010 EPS estimate for ASH is $4.36, and that looks about 5% low, according to my analysis.

Technically, Ashland's stock has formed a bear hug -- but a bouncy, volatile one -- hardly a short seller's dream -- and the calculation here is that the stock will hold support in the $40-41 range.

2010 Outlook: I view Ashland as a long-term play, but if investors are looking to sell
ASH within the year, it's probably best to take your profits after it rises to $57-59, if it fails to rise above $60.

Stock Analysis: I consider Ashland Inc. to be a moderate-risk stock. If an investor has already purchased the company's shares, I'd hold them. If not, I'd consider buying a 25% position in ASH now; then buy another 25% in one month, if U.S. economic conditions don't worsen substantially. Under any circumstance, I wouldn't buy more than 75% of my ASH position before October 2010 and I'd put a sell/stop loss at: $37.

Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.

Tags: ASH, Ashland Inc.