NEWMARKET CORP (NEU) stock intrinsic value fair value estimate & owner earnings analysis

WHAT THE BUSINESS IS NewMarket is two businesses. The big one is Afton Chemical, one of four companies that dominate the world market for petroleum additives, the chemical packages blended into engine oils, transmission and gear fluids, industrial lubricants and fuels. In 2025 it sold $2.53 billion of additives ($2.16 billion lubricant additives, $378 million fuel additives) and earned a 20.5% operating margin. The competitive advantage is the cost and time of qualifying formulations against engine-maker and industry specifications: an oil marketer that has certified a product built on Afton chemistry rarely switches, and new entrants face years of testing. The smaller business, specialty materials, was built through two acquisitions: AMPAC (January 2024, about $700 million), a leading producer of ammonium perchlorate, the oxidizer in solid rocket motors used in U.S. missile programs, NASA and commercial space launch, and Calca Solutions (October 2025, about $218 million). The 10-K states that foreign perchlorate producers are not qualified for most U.S. defense and NASA programs. That segment earned $47 million of operating profit on $182 million of sales in 2025. HOW WE MEASURED EARNINGS We measure owner earnings: cash from operations with working-capital swings removed, less stock compensation (small, about $3 million a year) and the capital spending needed to keep the business where it is. Two accounting points matter here. First, reported net income includes roughly $50 million a year of non-cash pension income from an overfunded pension plan. We exclude it because it is not cash the owners receive, and we treat actual pension contributions and lease payments as real costs. That is why our owner earnings run about 10% below net income. Second, amortization of the intangibles bought with AMPAC and Calca (about $37 million a year in 2026) is added back as a non-cash charge. We handle the risk that those assets wear out in the scenarios, not by cutting the earnings level. Over the last ten years owner earnings rose from about $187 million ($15.79 a share) in 2016 to $444 million ($47.27 a share) in 2025. The step up came in 2023-2025, driven by additive margins recovering from the 2021-2022 raw-material squeeze (margins of 12.0% and 13.7%) to 19.1%, 22.5% and 20.5%, plus the AMPAC acquisition. Share count fell from 11.8 million to about 9.2 million through steady buybacks. The additive business is cyclical in its margins, not its volumes. Prices trail raw-material costs, so margins fall when costs spike (2018: 13.6%; 2021: 12.0%) and recover afterwards (2019: 16.5%; 2024: 22.5%). Anchoring on the last three years alone would capture only the recovery. The full 2019-2025 cycle median per share ($25) understates the business, because it predates AMPAC and Calca and uses a share count 18% higher than today's. Our starting point is about $368 million, or roughly $40 a share on 9.2 million shares. We built it from the full-cycle median ratio of owner earnings to sales (11.6%) applied to current additive sales, plus the specialty materials segment at its current run-rate including a full year of Calca. That is well below the $47 earned in 2025. In 2025 owner earnings per share fell 3%, as additive shipments fell 4.9% (partly from deliberately dropping low-margin business) and prices slipped. We assume no growth in year one. Two things justify holding flat rather than declining: Calca contributes a full year after its October 2025 purchase, and first-half 2026 net income rose 6% on higher sales. THE CASES (discounted at 6%) Base, about $626 a share: earnings start at $368 million, flat in year one, then grow about 2% a year through year ten. The growth comes from the price pass-through the additive business has shown (sales rose from $2.05 billion to $2.53 billion from 2016 to 2025 on roughly flat volumes) and from the AMPAC ammonium perchlorate expansion. That project of up to $100 million began in 2025 and is scheduled for completion toward the end of 2026, to meet growing solid rocket motor demand. After year ten we assume engine-oil demand slowly erodes as electric vehicles take share of the fleet, which the company names as a risk that could make some products obsolete. Earnings then decline 1.5% a year for twenty years and 4% a year for another ten, and we assign nothing beyond year forty. Bear, about $299 a share: additive margins fall back to the 2018-2022 range (around 13%), which the business has hit twice in eight years. Defense perchlorate demand disappoints; the company notes it depends on government appropriations and specific programs. Starting earnings are about $271 million, falling 2% a year for ten years as additive volumes shrink, then 5% a year to zero value after year thirty. Debt of about $855 million is roughly two years of owner earnings, manageable but a drag if earnings shrink. Bull, about $945 a share: additive margins hold near the 20-22% of 2023-2025, which has now lasted three years and continued into the first half of 2026. The perchlorate expansion comes on schedule and fills. Earnings start near $470 million and grow 3% a year for ten years, stay flat for ten, then decline 1% a year to year forty. We did not credit buybacks as growth. They are funded from the same owner earnings we are already counting, and they add value only if shares are bought below their worth. WHAT WOULD MAKE THIS WRONG The load-bearing assumption is the normal additive margin. If the 2023-2025 margins turn out to be permanent, the base case is too low. If they fall back to the 12-14% seen in 2018 and 2021-2022, the bear case becomes the median. The other is how fast the vehicle fleet electrifies: lubricant additives were about 79% of 2025 sales, and a faster decline in engine-oil volumes than the 2025 drop of about 5% would shorten every case. We checked the margin question against the latest filings. Second-quarter 2026 operating income rose 14% from a year earlier and first-half operating income was up 1%, so margins have not yet started to revert. MARGIN-OF-SAFETY PRICE The margin-of-safety price is about $380. That is a discount of roughly 40% to the base case, reflecting the cyclical margins and the long-run risk to engine-oil demand. It is about 27% above the bear case, which is acceptable for a business with a century-long franchise, steady cash generation and moderate debt. From $380, the base case implies roughly a 20% annual return if the shares reach the base value within two to three years, including the dividend ($11.25 a share paid in 2025).