NewMarket Corp (NYSE:NEU) Passes Peter Lynch's GARP Investment Test

The investment philosophy of legendary fund manager Peter Lynch, as detailed in his book One Up on Wall Street, focuses on finding well-run companies with strong growth potential that are trading at sensible prices. This "growth at a reasonable price" (GARP) method highlights sustainable earnings growth, financial soundness, and a price that does not overestimate future prospects. Lynch’s method uses particular quantitative filters to find candidates, concentrating on items like a 5-year earnings growth rate between 15% and 30%, a Price/Earnings to Growth (PEG) ratio under 1, a high Return on Equity (ROE), and a careful balance sheet with low debt. The aim is to create a long-term portfolio of understandable businesses that can increase value over years, not months.

One company that recently appeared from such a filter is NEWMARKET CORP (NYSE:NEU). The Richmond-based holding company runs through its subsidiaries, mainly making petroleum additives for lubricants and fuels, and specialty chemicals for aerospace and defense uses. At first look, it matches the Lynch model of a company in a needed, if not exciting, field, providing essential chemical parts that keep engines running and rockets flying.

Fit with Peter Lynch Criteria

A central idea of Lynch's method is to find companies increasing earnings at a maintainable rate, not an extreme speed that cannot be kept up. He also states that investors should not pay too much for that growth, which is where the PEG ratio is key. Also, financial strength and earnings are required, making sure the company can withstand economic changes and pay for its own growth.

• Maintainable Earnings Growth: Lynch looks for companies with a 5-year earnings per share (EPS) growth between 15% and 30%. NewMarket's EPS has increased at an annual rate of 16.3% over the past five years. This puts it directly within Lynch's preferred range, showing a record of steady, above-average growth that is solid yet possibly maintainable, avoiding the warning of too much growth that could point to a bubble or coming drop.

• Sensible Price Compared to Growth: Maybe the most important Lynch filter is the PEG ratio, which compares the Price-to-Earnings (P/E) ratio to the earnings growth rate. A PEG under 1 implies the market may be pricing the available growth too low. NewMarket's PEG ratio, based on its past 5-year growth, is 0.94. This meets Lynch's specific standard, showing that at its current price, an investor is paying less than one dollar for each percentage point of past earnings growth.

• High Profitability: Lynch wanted a high Return on Equity (ROE) as a sign of an effective and profitable business that creates good returns for shareholders. NewMarket's ROE of 26.4% is much higher than Lynch's 15% minimum and is one of the best in its industry. This high ROE implies management is skilled at using shareholder money to create profits.

• Careful Financial Soundness: To limit high risk, Lynch liked companies with sound balance sheets. His filter uses a Debt-to-Equity (D/E) ratio under 0.6, and he personally wanted it below 0.25. NewMarket's D/E ratio of 0.46 meets the filter's need, showing a balanced capital structure with reasonable use of debt. Also, its Current Ratio of 2.68 shows more than enough cash to cover near-term debts, giving a good margin of safety.

Fundamental Soundness Summary

A wider view of NewMarket's fundamental profile supports the image shown by the Lynch filter. According to a full fundamental analysis report, the company gets high ratings for its financial soundness and profitability, which are basic for any long-term investment.

• Profitability Soundness: The company gets a nearly top rating for profitability, with excellent measures. Its Return on Invested Capital (ROIC) of 15.9% and profit margins above 16% are much higher than industry averages, confirming the effectiveness shown by its high ROE.
• Firm Financial Base: The health rating is also sound, backed by a good Altman-Z score showing low bankruptcy risk and the very good Debt-to-Free-Cash-Flow ratio of 1.44, meaning it could pay off all debt in less than a year and a half with its current cash flow.
• Shareholder Benefits: The company has a steady and rising dividend, having raised it for over ten years with a maintainable payout ratio. It has also been lowering its share count through buybacks, a practice Lynch liked.
• Price and Growth Setting: The price is seen as similar to industry averages, with a P/E ratio a bit below that of the wider S&P 500. The main point of care in the report is on growth, while past EPS growth is sound, recent sales trends have been flat to slightly down, and there are no forward analyst estimates to measure future speed.

Is It a Lynch-Type Chance?

For an investor using the ideas of Peter Lynch, NewMarket Corp shows an interesting case. It meets the quantitative checks of his method, showing a record of maintainable earnings growth, trading at a sensible price relative to that growth (PEG < 1), and having high profitability and a careful balance sheet. It works in a stable, needed industry, the exact kind of "simple" business Lynch liked. The high ROE and ROIC suggest a lasting competitive edge in its specific markets.

The questions for more study, as Lynch would require, would involve qualitative understanding. An investor must judge whether the company's growth sources in petroleum additives and aerospace chemicals can continue, how it handles input cost changes, and if its markets give enough space for continued growth. The lack of very high growth is, in the Lynch view, a positive, not a problem, it suggests a business that might be missed and able to grow steadily over the long term.

This review of NewMarket Corp was prompted by a stock filter based on Peter Lynch's investment method. You can find more companies that currently meet these GARP standards by using the Peter Lynch Strategy filter. Keep in mind, a filter is only a first step for more complete fundamental research.

Disclaimer: This article is for information only and does not make up financial advice, a suggestion, or an offer to buy or sell any security. Investing includes risk, including the possible loss of principal. You should do your own research and talk with a qualified financial advisor before making any investment choices.