Valhi Shareholders Should Watch Out for Declining Sales in the Chemical Segment


On May 9, VHI released its Q1 2016 earnings, where the revenue came out 15.16% lower than Q1 2015

VHI’s chemical segment posted only a $3 million operating income in Q1 2016, which is substantially lower compared $34 million in Q1 2015

Moody’s downgraded Kronos Worldwide Inc VHI’s chemical segment, to B1 amid a strong downtrend in TiO2 prices this year

We believe the management could have taken measures to reduce expenses to weather the market conditions and it would affect the stock price in the short term

Company Overview

Valhi Inc (NYSE:VHI) is registered in Delaware as a holding company and currently trades in the New York Stock Exchange as a controlled company. The holding company has a number of majority owned subsidiaries and non-majority affiliate companies that operates in four segments, chemicals, component products, waste management, and real estate management as well as the development of real estate assets.

The chemical business of Valhi Inc is operated through Kronos Worldwide Inc. Kronos Worldwide Inc is mainly involved in producing marketing titanium dioxide pigments for the global market.

Valhi Inc has interests in another company called CompX International Inc, which is involved in manufacturing security products that has utility in recreational transportation, postal, cabinetry, tool storage, healthcare and a range of other industries.

Valhi Inc’s another company called Waste Control Specialists LLC is involved in processing, treatment, storage and disposal of hazardous, toxic and other wastes.

Last but not least, Vahli Inc operates in the real estate management and development arena through two more companies called Basic Management Inc and The LandWell Company. Where The LandWell Company is a land developer for commercial and residential uses, the Basic Management Inc offers utility services to various commercial and residential entities.

As of May 28, 2016, Valhi Inc had a market capitalization of $691.61 million and the employed 2,280 people via its various enterprises.

Review of Q1 2016 Financial Results

On May 9, Valhi Inc released its first quarter 2016 earnings, where the quarterly revenue of the company came out at $353 million. The Q1 2016 revenue came out 15.16% lower compared to the same quarter last year’s $416.10 million due to lower average TiO2 selling prices in the chemical segment. However, in the press release Valhi Inc claimed that “the Chemicals Segment`s sales volumes in the first quarter of 2016 set a new record for a first quarter,” which helped offset lower revenue.

Valhi Inc’s chemical segment only managed to post a $3 million operating income, a sharp 10-fold decline compared to $34 million in Q1 2015.

Valhi Inc’s component segment experienced a 3% slowdown in sales compared to the same quarter last year and its waste management segment’s net sales dropped by $9.8 million in Q1 2016 against Q1 2015.

Also, the management of Valhi Inc has attributed the strong dollar as a major cause of low revenue as it effectively reduced the European sales in Euro by $11 million compared to Q1 2015.

As a result, during Q1 2016, Valhi Inc reported a $19.5 million loss, which came out at $0.06 per diluted share. It is worth noting that in Q1 2015, Valhi Inc posted a net profit of $11.9 million, which came out at $0.04 per diluted share.


Figure 1: Valhi Inc’s Stock Price Has Gone Up by 37.5% Since the Release of Q1 2016 Earnings

Regardless of the disappointing earnings in Q1 2016, Valhi Inc’s stock price has climbed from $1.75 on May 9 to $2.48 on May 25, representing a 37.5% increase. However, the price has fell to $2.05 by the end of the week and currently up around 17.82% based on the May 9’s market price.

The recent surge in the stock price and subsequent fall could be explained by the $0.02 cash dividend issued by the Valhi Inc management on May 26. It is unclear why the management decided to issue the quarterly cash dividend despite posting a net loss in Q1 2016, but perhaps they were trying to boost the stock price by issuing the dividend in order to convey a subtle message to stockholders that business is as usual.

Moody’s downgrades Kronos Ratings to B1

Two days prior to announcing the quarterly cash dividend, on May 24, credit rating agency Moody’s downgraded Kronos Worldwide Inc’s rating from Ba3 to B1, which signifies that the chemical segment is being judged as “speculative and a high credit risk.”

Justifying the downgrade, Moody’s Vice President, Joseph Princiotta, noted that “the trendline in TiO2 prices this year will determine if Kronos’ ratings stabilize at the B1 level, or warrant a further downgrade later this year if prices and metrics fail to sufficiently recover.”

Moody’s said in a statement that “the downgrade reflects the extent to which Kronos metrics have come under pressure due to the cyclical weakness in the TiO2 pigment markets.”


While sales and operating income was falling across all major segments, Valhi Inc management seems to be busy maintaining appearance that a broader macroeconomic factors and cyclical commodity price pressures along with a strong US currency the cause of such temporary decline.

Regardless of the outside factors, we believe the management had the opportunity to scale back in order to minimize such impacts. In Q1 2015, total operating expense of Valhi Inc came out at $379.8 million, which is $20.1 million higher compared to the previous quarter’s, Q4 2015’s, $359.70 million – a 5.59% increase.

Furthermore, we believe that Valhi Inc could have restrained from issuing the quarterly cash dividend and admitted that the business is actually not as usual and they have to take measures the counter the 10-fold drop in operating income in the chemical segment.

The recent downgrading of Kronos Worldwide Inc by Moody’s indicates that the situation could further deteriorate in the coming months and we believe it would have negative impact on the company’s stock price and secondary investors should consider the possibility of reducing their exposure in this company in the short-run.