Globalism Lifts Nalco

Posted by: Joe Weber on May 28

nalco_logo_2_thb.jpg Even before the recession raced around the globe at record speed, globalization was getting a bad rap. But for companies such as Nalco Holding Co., a $4-billion-a-year supplier of industrial water treatment systems and chemicals that operates in 130 countries, it is a godsend. Offshore markets, which are showing far more promise than the domestic scene, are keeping the lights on at the Naperville (Ill.)-based outfit – and attracting growing interest by none other than uber-investor Warren Buffett.

While North America has been hobbled by hard times, Nalco is expecting solid growth in developing markets. Half of its sales still hail from North America, but the company is looking toward such spots as Brazil, Russia, India and China for coming gains. Despite recent setbacks, those countries are expected to average more than 8% annual industrial production growth through 2018, according to estimates cited by analysts at the Cannaccord Adams investment research firm.

The company, reaching out aggressively into developing markets, in June opens a specialty chemical operation in Alexandria, Egypt. Next year, it plans to open plants in Russia and Equatorial Guinea. Last year, it opened a research facility and a second manufacturing plant in China.

Nalco, which employs hundreds of Ph.D scientists and thousands of engineers expert in a broad range of industrial processes, has been staffing up to serve its growth markets. Through March of this year, the outfit added 169 staffers in Latin America and the Asia Pacific region, for instance, even as it trimmed its North American staff by 116 over last year. Overall, Nalco’s headcount now, at 11,601, is just 16 lower than last year – a remarkable record for a company dependent on such challenged industries as oil and paper. Chief executive officer J. Erik Fyrwald told analysts recently, “we continue to invest in emerging global geographies.”

The company is particularly focused on China and India. It is planning to hire some 75 more highly skilled staffers in those countries. Already, it boasts 554 employees in China and 243 in India.

Fyrwald knows all too well that this is a tough time to be spending any money, much less adding staff. He called the first quarter “the most challenging business environment in my life, with many industrial producers shutting down operations and many companies going bankrupt.”

Indeed, the company logged a slide in financial results in the quarter and warned that some headaches were bound to continue. Net income fell to $23.2 million, down $6 million from the first quarter of 2008. Revenue plunged 13% to $868.4 million. In part the strong U.S. dollar dimmed results, but recent weakening could help by making Nalco's services less expensive to offshore buyers. Last year, the company lost $342.6 million on $4.2 billion in sales.

Enthusiasts for Nalco expect that the company will emerge stronger from the tough times. Investment guru Buffett, for instance, has voted powerfully with his wallet for Nalco. Buffett late last year took a 6.4% stake in the company’s stock by buying 8.7 million shares, and he recently upped his holdings to 9 million shares.

The Oracle of Omaha has traditionally been fond of companies that serve industrial areas that are likely to grow, such as the petrochemical sector that accounts for much of Nalco’s work. Oilfield chemicals are a big part of Nalco’s product line.

Buffett also is known to get excited by companies that seem like a bargain. After dropping as low as $7.80 a share last winter, Nalco’s stock – probably buoyed by Buffett – has bounced back to about $17 a share, topping recent Canaccord analysts’ target price by nearly $1 a share. The analysts expect the company to earn about $144 million this year on $4 billion in sales.

For investors who believe that industries such as energy will come back and that globalism can be a very profitable as well as powerful force – or for those who just like to ride the coattails of a certain Nebraskan – Nalco may offer a very intriguing test case.

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BusinessWeek’s Joe Weber, Patricia O'Connell, Michelle Conlin, Frederik Balfour, Peter Coy, Greg Spielberg and Roger Crockett examine The Case for Optimism by looking past the financial turmoil and economic unrest gripping the globe to focus on the promising future that lies on the other side of this storm. We’ll chronicle the forward thinkers investing in R&D, launching promising new products, entering new markets, or implementing management and leadership.

See why BusinessWeek Editor-In-Chief Stephen J. Adler is optimistic about the economy amid the sharpest downturn since the Great Depression.

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