Options Trade – Ashland Inc. (ASH)

Market's Pullback Providing Excellent Opportunity To Buy Ashland!

**OPTION TRADE: Buy the ASH Jan 2013 75.000 call (ASH130119C00075000) at or under $3.10, good for the day. Place a protective stop limit at $1.20 and a pre-determined sell at $4.50.

by Ian Harvey

September 28, 2012


Ashland (NYSE: ASH) - This global specialty chemical company has operations in more than 100 countries. Analysts, including S&P, have been raising both earnings and price targets on the company.

Technically, Ashland has been in a powerful bull channel since December 2009. A pullback from over $78 just two weeks ago, to under $70 on Wednesday, provides an excellent opportunity to own this quality chemical producer.

About Ashland Inc.

Founded in 1918, Ashland Inc. (Ashland) is a global specialty chemical company that provides products, services and solutions throughout a variety of industries. Ashland’s business operates in four segments: Ashland Specialty Ingredients; Ashland Water Technologies; Ashland Performance Materials and Ashland Consumer Markets.

On March 31, 2011, Ashland completed the sale of substantially all of the assets of its global distribution business to Nexeo Solutions, LLC. On August 23, 2011, Ashland completed the acquisition of International Specialty Products Inc. (ISP). In January 2012, Celanese Corporation acquired certain assets from Ashland, which include two product lines, Vinac and Flexbond.

The company's Consumer Markets segment markets Valvoline, the world's first lubricating oil. It also operates the Valvoline Instant Oil Change, the nation's second-largest franchised quick-lube chain with roughly 870 locations. Ashland, which has a market cap of roughly $6 billion, offers specialty chemicals in more than 100 countries.

Analysts Predictions

On Monday, S&P raised fiscal year (FY) 2012 (ending in September) earnings per share (EPS) estimates to $6.55 from $6.35 previously, and FY 2013 EPS to $7.75 from $7.50. S&P also raised its price target for the stock to $87 from $80. Analysts see further margin expansion due to strength in the energy sector and a recovery in the construction sector.

On the 26th September, Ashland had its buy rating reiterated by analysts at Longbow Research. The firm currently has an $85.00 price target on the stock.

Moving Ahead

Ashland Inc. is poised for growth due to strong demand from energy and construction markets, as well as attractive synergies from an acquisition. The specialty chemicals maker, best known for its Valvoline automotive lubricants, has posted seven positive earnings surprises in a row with shares hitting new record highs lately. With low valuation metrics, including a price-to-sales (P/S) ratio of just 0.8, this (Strong Buy) stock is a compelling value pick.


On July 26, Ashland reported adjusted earnings of $2.04 per share for the third-quarter fiscal 2012 (ended June 30), which trumped the Consensus Estimate of $1.80. It was the eleventh positive earnings surprise in the past twelve quarters.

Profit from continuing operations more than doubled year over year to $160 million, buoyed by a strong performance from the core Specialty Ingredients segment and the acquisition of International Specialty Products Inc ("ISP").

Revenues shot up 23.5% year over year to $2.1 billion. The company saw significant demand in the energy market during the quarter, leading to accelerated growth of its specialty additives.

While the Specialty Ingredients division delivered double-digit growth in the quarter, sales fell across the Performance Materials, Consumer Markets and Water Technologies segments.

Operating income more than doubled over the prior-year quarter to $263 million.

The roughly $3.2 billion acquisition of ISP has reinforced Ashland's position in high-growth markets such as energy, personal care and pharmaceutical. The integration of ISP is currently underway and the company expects to achieve its cost synergy target in fiscal 2013.

Plenty of Value

Ashland has performed reasonably well so far this year, generating a healthy year-to-date return of roughly 32%. Moreover, shares hit a new 52-week high of $77.62 on September 13, 2012.

Ashland has a lot to attract investors seeking value. In addition to having a low P/S, the stock has an attractive forward P/E ratio of 11.8. It also sports a low price-to-book (P/B) ratio of 1.4. (A P/S ratio lower than 1.0, a P/E below 15.0 and a P/B ratio under 3.0 generally indicate value).

Therefore, with this perfect example of a stock to buy in a correction, and based on the facts above the following options trade is recommended…..

**OPTION TRADE: Buy the ASH Jan 2013 75.000 call (ASH130119C00075000) at or under $3.10, good for the day. Place a protective stop limit at $1.20 and a pre-determined sell at $4.50.

”Success is simple. Do what's right, the right way, at the right time.”

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Options traders win because they are successful.

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