At Morton, Much More Than a Dash of Cash

Morton Salt buildings sustained significant damage during Hurricane Ike. The company can rebuild if it wants to.

By MICHAEL BRUSH

WHEN it rains it pours.” Of all of corporate America’s slogans, the one that adorns the blue Morton salt box, complete with the picture of a little girl holding an umbrella and inadvertently spilling salt, is one of the most famous.

But Morton International Inc., which has produced the table salt ever since its founding in Chicago in 1848, makes a lot more than that. It sells glues for food packaging, durable finishes for furniture and sodium borohydride, a substance used to bleach newspaper. So-called specialty chemicals like these account for about two-thirds of Morton’s profits. And much of its salt — which accounts for the other third — is used not in the kitchen but for snow and ice control, animal consumption and industrial production.

Some experts say this diverse company is a good investment. Although its stock is not cheap, Morton is a cash-rich cost-cutter, they say, that is divesting itself of products unrelated to its major lines and that has a history of stock buybacks and other investor-friendly moves.

A month ago, for example, Morton spun off its air bag division into a joint venture with Sweden’s Autoliv A.B. The division was successful, but it had no synergies with other Morton businesses.

Then comes cost-cutting in the company’s specialty chemicals business. ”Morton has been growing through acquisition, but it never really went back and rationalized its plant infrastructure,” said Mark R. Gulley, an analyst with Morgan Stanley. Now it is starting to do so, closing down less efficient plants, including a packaging-glue operation in Stamford, Conn., and discontinuing less profitable products.

Like some other fund managers, John Forelli of Independence Investment Associates in Boston says such changes can bolster Morton’s profit margins in chemicals from their current level of 15.5 percent, to 18 percent to 20 percent over the next three years. Given chemical sales of $1.7 billion a year — salt revenues are about $600 million — these efforts may have the biggest impact on Morton’s bottom line.

But Morton, based in Chicago, also hopes to widen profit margins at Salins du Midi, a big French salt producer that it acquired in March for $275 million.

Morton is an old pro at fattening salt profits by trimming costs. From 1985 to 1996, it raised margins at its already efficient American salt operations to 21 percent from 16.5 percent, so it should have little trouble increasing Salins du Midi profit margins to a goal of 14 percent, from the current 7 percent, in five years.

After the planned cost trims at Salins, however, earnings growth in Morton’s salt division is likely to be fairly limited. Earnings will rise only in line with sales. Specifically, profits from industrial salt will rise if the general economy grows, while table salt earnings will increase with the population. Profits from salt used for snow and ice control, of course, depends on the weather.

But reaching high efficiency does not mean that the salt division cannot help Morton’s share price, said Jim Weir, director of research at Highland Capital Management in Memphis, which owns Morton shares in its First Funds Growth and Income fund. The salt division generates a great deal of cash that can be redeployed elsewhere, given that Morton is more or less free of debt, he said. Indeed, money from salt helped Morton to develop its air bag operation, which brought in $750 million tax free from Autoliv.

MOREOVER, Morton expects to generate $160 million in uncommitted cash in 1997. It hopes to use that money, plus some proceeds from the sale of the air bag division, to buy other companies to build its chemicals business. Although many of Morton’s competitors have the same idea and thus all face a seller’s market, Mr. Weir and Mr. Forelli expect that Morton will still make attractive buys.

In addition, Morton plans to use some of the Autoliv money for a share buyback, which usually pushes up a stock price. The company announced the buyback of 10 million shares in April, and Mr. Gulley would not be surprised if another buyback followed.

Indeed, Morton is known for being nice to investors, said Steve Markusen, portfolio manager of the Piper Growth fund, which owns Morton shares. He cited a ”history of paying attention to shareholder value” as another attraction of the stock.

All told, Morton’s plans to cut costs, buy chemical companies and repurchase shares could increase earnings by 14 percent a year for the next three years, Mr. Gulley predicted. Other Morton watchers agree, and that raises the stock’s biggest downside: it is no bargain.

At Friday’s closing price of $32.25, Morton stock was trading at 19 times its estimated earnings per share for the next four quarters, according to Charles Hill, director of research at First Call. That multiple seems to be high relative to other specialty-chemical stocks, although such comparisons can be misleading because of differences in company products. The stocks included in the Dow Jones specialty chemical index, for example, trade at an average of 16.4 times estimated earnings for the next four quarters, Mr. Hill said.

Peter Doyle, an analyst with the Spin-Off Report, a research service in New York, said, ”If you are looking for great value in the marketplace, I wouldn’t recommend this company,” but he still judges Morton to be a ”high quality” outfit.

Despite its stock price, Morton may be worth watching. Several factors can depress the price and make it an attractive buy while not tarnishing long-term prospects. The price could fall if the cost of its raw materials rose temporarily, for example, or if the dollar strengthened and reduced overseas earnings.

Mr. Markusen and some other experts say a dip to $30 or so would make Morton stock attractive.

Given the price appreciation that some analysts predict, many investors may not want to wait for any dip. Although other analysts have more modest expectations, Mr. Markusen thinks the stock may hit $40 in the next 18 months. At the current price of $32.25, that would mean an annual appreciation of 16 percent.

Mr. Doyle and other analysts also see at least the possibility that Morton will spin off its salt division, which would generate cash for financing buybacks and buying more specialty chemical companies — and attract the attention of Wall Streeters who reward companies that spin off unrelated units.

”There is not a lot of overlap between the salt business and specialty chemicals,” said Mr. Doyle. Citing the spinoff of the air bag division and of Morton Thiokol, an engineering unit Morton sold years ago, Mr. Doyle also argued that ”management has a record of doing this.”

But other analysts say Morton wants to keep its cash cow. And the company itself, citing its long history as a seller of salt, discourages thoughts of another spinoff.

In any case, as investors ponder this and other questions that surround this attractive but relatively costly stock, they may find themselves idly wondering about the meaning of its signature slogan, ”When it rains it pours.” Does it just describe the little girl who is accidentally spilling salt on the ground as she walks in the rain?

No, Morton says. It also alludes to a major, turn-of-the-century innovation: the addition of a substance, calcium silicate, to salt to keep it from clogging during rain or other conditions of high humidity.