NEWMARKET CORP (NYSE:NEU) Fits Peter Lynch’s Growth at a Reasonable Price (GARP) Strategy

Peter Lynch’s investment strategy, as described in One Up on Wall Street, centers on finding companies with steady growth at fair prices, commonly known as the Growth at a Reasonable Price (GARP) method. The approach highlights key financial measures like earnings growth, profitability, and stability, while steering clear of overly speculative or debt-heavy firms. NEWMARKET CORP (NYSE:NEU) appears to match this model, based on a review using Lynch’s standards. Here, we explore why NEU could appeal to investors looking for a mix of growth and value over time.

Key Metrics Matching Peter Lynch’s Approach

1. Steady Earnings Growth
   Lynch preferred firms with reliable earnings growth, usually between 15% and 30% per year. NEU’s 5-year EPS growth of 16.30% fits this range, showing stable progress without overextension. This growth is backed by the company’s focus on petroleum additives and specialty materials, which cater to steady industrial and aerospace sectors.

2. Fair Valuation Using PEG Ratio
   The PEG ratio (Price/Earnings to Growth) is central to Lynch’s method, with a figure below 1 indicating potential undervaluation. NEU’s PEG ratio of 0.90 implies the market may not fully account for its earnings potential, providing a buffer for investors.

3. High Profitability and Effective Capital Management
   Return on Equity (ROE) is a key gauge of profitability, and Lynch looked for ROE above 15%. NEU’s ROE of 29.69% surpasses this mark, showing strong use of shareholder funds. Its Return on Invested Capital (ROIC) of 17.20% further confirms careful capital deployment, a trait of resilient businesses.

4. Prudent Financial Setup
   Lynch avoided firms with high debt, favoring those with a Debt/Equity ratio below 0.6. NEU’s ratio of 0.52 reflects a balanced approach to financing, lowering risk in tough economic times. The company’s Current Ratio of 2.66 also shows it has enough liquidity to handle near-term needs.

Financial Strength and Market Role

Our fundamental analysis report gives NEU a score of 7 out of 10, noting its strong profitability and financial stability. Key points include:

• Profitability: NEU ranks above 97.65% of peers in ROE and 98.82% in ROIC, with improving margins.
• Dividend Reliability: A modest but rising dividend (6.59% yearly growth) is well-supported by earnings, with a payout ratio of only 20.86%.
• Valuation: With a P/E of 14.63, NEU is priced lower than 75% of its industry peers and the broader S&P 500 (P/E 26.48).

Why These Factors Matter for GARP Investors

Lynch’s strategy favors businesses that are easy to grasp, financially solid, and fairly valued. NEU’s focus on petroleum additives—a sector with high entry barriers and consistent demand—matches Lynch’s liking for “boring” but vital industries. Its metrics show a company growing earnings without heavy debt or market hype, making it a potential choice for long-term gains.

Find More Stocks Like This

For investors interested in similar opportunities, our Peter Lynch Strategy screen offers a filtered list of stocks meeting these criteria.

Disclaimer: This analysis is not investment advice. Investors should perform their own research or seek professional guidance before making decisions.