Keybanc is out with a pretty major downgrade on Arch Chemicals (NYSE:ARJ) cutting their rating to Underweight from Neutral with a $18 tgt.
In the face of many headwinds, they are reducing their FY09 estimate to $1.80 from $2.30 vs. 2008 EPS estimate of $2.25; firm's $2.25 estimate is the midpoint of Arch Chemicals, Inc.'s current full year guidance of $2.20-$2.30.
In their many discussions with companies over the past few weeks, they are seeing a lack of urgency in further reducing current cost structures and companies may not be doing enough to adjust to the current environment. Keybanc senses that ARJ may be in this camp; this is their opinion only. As volumes tumble with weakening demand we should see a sharp increase in unabsorbed overhead, which would lead to an overall reduction in profitability.
The headwinds that ARJ is facing in 2009 are a strengthening dollar, a weakening European and Asian economy, higher pension costs, higher interest expense, continued weakness in North American housing, and lower non-residential construction spending. The Advantis acquisition, lower shipping costs and benefits from the Company's HTH plant expansions and the personal care plant in China will partially offset some of these headwinds.
At this time they do not see a reason why investors would want to establish a new position at the current price near $26.
Notablecalls: I suspect this call has what it takes to destroy the stock today. By destorying I mean a 6-10% downside move. Note the $1.80 FY09 EPS estimate is the new Street low (consensus stands at $2.39).
Keybanc's downside price target is based on a P/E of 10x estimated 2009 EPS of $1.80. Sounds prudent in current environment.
