Wolf’s Coronavirus Discounts: Celanese Corporation (NYSE:CE) | Seeking Alpha
I have shares in some companies of materials and chemical products, both national and international. Major international holdings include BASF (OTCQX:BASFY), Lyondellbasell (LYB), Eastman Chemical Company (EMN), Cabot Corporation (CBT), PPG Industries (PPG), and now my newest addition, Celanese Corporation (NYSE:CE).
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while the sector as a whole may be subject to higher than average volatility due to commodity prices and economic fluctuations, the fact is that it also meets the basic human requirements and demands that exist in our society modern, regardless of the economic situation. As such, I consider any chemical or basic materials company worth its salt in stability to be an excellent overall long-term investment.
Reading: What is ce in stock market
This is the case of Celanese Corporation.
celanese – what does the company do?
irving, texas-based celanese, or hoechest celanese, is a fortune 500 company. dipping straight in, the company, which was founded more than 100 years ago, is the world’s leading producer of ch3co, the chemical acetyl.
(source: 4q18 presentation)
So, the company’s products are found in many different chemical sectors, but it can be said simplistically that they fall into the following segments.
- intermediate chemicals is the company’s largest segment and also what the company has been “doing” for the most part. It includes very basic chemicals such as acetic acid, acetic anhydride, and vinyl acetate. These are extremely basic chemical intermediates that are used in a wide range of industries, including other chemicals, paints, coatings, construction, and adhesives. intermediate segments contain products such as polysolvan, formaldehyde, ethyl acetate, butoxyl, and many others.
- cellulose derivatives is a smaller segment in terms of a number of products, including the acetate flakes, acetate tow and acetate non-woven from celaire. these products are used in filtration, luxury packaging, insulation, medical and non-woven applications.
- emulsion polymersare primarily construction chemicals used in construction across the country and the world. They include tufcor, acrylic homopolymers and copolymers used for jointing compounds, putties, sealants, binders and foams.
- eva polymers: eva stands for ethylene vinyl acetate, which is used in flexible packaging for food products, blood bags, adhesives, thermal lamination, photovoltaic cells, medical tubing, etc. medical implants.
- food ingredients manufactures as much as its name suggests, food ingredients such as acesulfame potassium and various sorbates. this includes chemicals for wine, baked goods, soft drinks, cheese, pharmaceuticals, hygiene applications and others.
- engineered materials is one of the other massive segments of the company and produces the aforementioned high performance polymers such as celanex, hostaform, cestran, fortron and thermx polyesters, all and more, registered products or trademarks. these products are used in everything from large vessels such as boats, cars, tools, electronics and much more.
(source: 1q19 presentation)
All of these product lines and segments are summarized in the following reportable segments.
- acetyl chain
- engineering materials
- acetyl trailer
celanese doesn’t provide easy-to-digest material, which, frankly, I find quite refreshing. What we can say based on the information available and without delving into the financials at this time, is that Celanese is a leading global producer of chemicals that have an intermediate role for all major industries.
Take a look at engineering materials for an example.
(source: 2019 annual report)
In terms of crucial products for the company’s sales, we can see the key products:
- acetyl products, such as acetic acid, vam, acetic anhydride, and acetaldehyde. It is used in adhesives, paints, films, coatings, and textiles, as well as in detergents and pharmaceuticals, and is a core chemical for the production of other chemicals. represents 27% of fiscal year 2019 sales.
- polyacetal, under the trademarks celcon and hostaform , represents 12% of the company’s consolidated sales for fiscal year 2019.
- acetate tow and flakes, which are primarily used in cigarette filters, and acetate flakes acetate are then processed into acetate tow. sales of this product amounted to 9% of fiscal year 2019 sales.
Geographically, the company is expanding globally through strategic affiliates located around the world. This includes 25-50% ownership of factories that produce pulp, fibers and chemicals in Japan, South Korea, Saudi Arabia and China. The company also has factories in Germany.
The company employs 7,714 people in fiscal 2019, of which 3,520 are in North America, with the majority of non-native employees in Germany (1,560) and the rest of Europe.
Unlike some companies, Celanese does not produce chemicals against a backlog (similar to other companies in the same segment), but directly against incoming orders and a certain amount of forward projection of future demand.
(source: 3q18 presentation)
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I hope that, even though this company presentation may not have been as colorful as the articles I usually write, given the lack of colorful company information, it will still show you what celanese is and a bit of what it does. . In short, Celanese makes money by:
- research, development, manufacture and sale of chemical products, polymers and derivatives which, in turn, are used as basic components in almost all the main industrial segments in the world . The company’s products are needed across the board and while there are competitors, both domestic and international, Celanese has survived for over 100 years and has supplied the industry with high quality products ever since.
let’s look at some financials.
celanese – how has the company been doing?
Celanese is, unlike other chemical and basic materials companies, almost too stable and excellent in terms of overall performance. i see the name as completely subsumed here at sa in terms of what the company offers. Take a look at the relative outperformance of both the relevant index and the S&P 500.
(source: celanese fy19 report)
We can expect future results to be affected by the coronavirus of course, but unless people stop eating or consuming ‘stuff,’ celanese is unlikely to be affected for more than a few years as maximum.
Long-term comparative earnings are favorable. the last report we have is fy19, and this includes 4q19, which was not so favorable. in general, for the whole year, we are seeing:
- Sales were down 12% just north of 2017 levels, and 2018 is definitely considered an outlier with $7.15 billion in sales, down to ~$6.3 billion in 2019.
- Operating profit was down 37% to slightly below 2017 levels, nearly $500 million below 2018 levels.
- diluted boa of $6.89 per share, above 2017 levels but well below the $8.95 per share found in 2019.
These results were mainly due to lower prices, unfavorable exchange rates due to foreign currency weakness and lower polymer volumes related to the economic slowdown and tariffs in 2019. While certain segments in Celanese are more or less affected by tariffs and the automotive industry, engineering materials are directly exposed to these headwinds.
The company managed to reduce general and administrative expenses by $63 million, down 11% year over year, due to lower incentive compensation and lower project spending. the results could have been even worse, but were offset by lower material costs in acetyl. The company also suffered an unfortunate fire at the Clear Lake facility, resulting in repair costs of nearly $40 million that were included in the year.
The acetyl chain segment, in particular, suffered heavily, down 16%, due to pricing issues, foreign exchange and lower volume demands. the bridge sees a 13% decline due to pricing alone, with currency accounting for 2% of the decline and volume around 1%.
In today’s coronavirus-infested world, liquidity is of the utmost importance. You’ll be pleased to know that Celanese, when it comes to cash on hand, is set for quite a while. The company has nearly $1 billion ($978 million) available in a senior unsecured revolver and $5 million in accounts receivable as of 2019. The company’s note maturities are extremely well staggered, none in 2020 and only one in 2021. The largest principals are due in 2023, and in terms of other debt, most are due in 4-5 years, as opposed to 1-2 years.
(source: 2019 report)
Current net debt/ebitda certainly can’t be called stellar, but 2.38x ntm net debt/ebitda with 8.81x interest coverage is certainly acceptable for a company in this space with $6-7b worth of revenue.
celanese also has excellent overall margins, at 16% and just 2% less than the record year of 2018, as well as a ROE of almost 30%.
you can find more security in the payment of the company. since it hasn’t paid dividends for a long time, and less than 10 years ago it had an eps payout rate of 5%, the current ltm payout rate is 25% can be seen as ridiculously conservative. Given the number of shares outstanding, Celanese’s annual dividend can be paid with $310 million in cash each year at current levels, giving the company enough liquidity and time to do so. Celanese notes are rated Baa3 by Moody’s, making them a low to medium investment grade. celanese as a company was upgraded to bbb from bbb- with a stable outlook about a year ago, making the company investment grade.
So, how has the company fared? celanese has averaged a growth rate of 16.73%eps over the past 15 years. this is not just good, these are really amazing numbers for a company in this business. While we can and should expect the coronavirus and the economic shock to hit the business like it did during the last recession, some of these things are already included in the current forecast.
In summary, Celanese is doing well, and while 2019 was a negative year, it was negative due to factors that are neither specific to Celanese nor unique to the company.
celanese – what are the risks?
celanese has many risks.
- celanese has exposure to multiple geographies, some with unstable socioeconomic conditions that may affect the company’s operations. this represents one of the company’s biggest risks.
- celanese has a significant exposure to commodity prices, as each price change in a basic supply such as methanol directly influences the profits of the company. Again, it’s not unique to Celanese, but the price of ethylene, methanol, carbon monoxide, and natural gas greatly influences the company’s capacity and profitability.
- Celanese’s chemicals business type is subject to multiple sets of legislative regulations, all of which celanese must take care to follow. these include international, national, state, local, and others.
- foreign exchange risk is not negligible, as the segment-specific 2% decline in earnings was simply due to the highlights of the unfavorable exchange rate during 2019 .
so while I think celanese is an excellent company, we also need to carefully consider the risks involved.
celanese – what is the valuation?
And we get to my reason for investing, or parts of it, at least. let’s take a look.
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celanese should take a hit from the coronavirus as this makes the company’s earnings potential for 2020 and potentially 2021 a bit uncertain. however, because of this, should the company start approaching recession-level figures? I say no.
We saw a similar development in 2008-2009. While Celanese trades at a material market-assigned discount to fair value, the company typically hovers around 10.8-12 p/e or so; it is now trading at 8.8x and was as low as 7.7x when I bought it.
investors who bought celanese even given the current slump we’ve experienced after the financial crisis would have made annual returns of almost 25% at current levels, including dividends. I think we’re setting ourselves up for another potential for market-beating amounts of return from investing in this chemical company.
celanese is even safer than some of its peers, in terms of forecast accuracy. basic materials companies are notoriously difficult to forecast.
Analysts generally do quite well with Celanese. while the forecasts certainly can’t be considered gospel, there is some safety here. the performance isn’t amazing when compared to lyondellbasell or eastman chemical but the growth has been higher and while i consider lyb to be a high yield company and eastman to be sort of a “central” dividend company there is only one name to be given to a company that has increased the dividend 31% per year on average during the last 10 years.
That name, or classification, is “dividend growth stock.” and that’s something I strive to look for.
(source: quick graphics)
At these valuations, you hardly stand to lose, as even a return-to-market discount generates potential returns of 22.5%. when I bought, even a drop to 5x earnings over time wouldn’t have lost me any money given the dividend, and even at current valuation a drop to ~6x p/e for a long time will still be “safe”, as long as your investment, including dividends, does not turn negative.
i consider celanese, along with eastman, to be a class, a kind of investment. does not share eastman’s ultra-safe rating due to a slightly lower dividend safety of “just” “safe” than just safe dividends, but this is more than enough to make it a tier 2 safety stock in the materials segment basics.
my thesis includes this.
with an earnings yield of nearly 12%, a safe dividend representing 25% ltm eps, investment grade credit rating, ~30% average annual dividend growth, you could be setting yourself up for extreme alpha By investing in Celanese at this valuation. that is the reason why i have invested in celanese at this time. while I see potential downsides stemming from socio-economic factors and the coronavirus, the long-term outlook for celanese is so good that I would have considered it an oversight not to invest here.
My love for the most basic industries continues. celanese doesn’t have the sky-high yield of lyondellbasell, nor the relative greater safety of eastman, but it does have higher dividend growth and a diverse portfolio of attractive products that will be required, required and possibly never “go out of style” as long as we live in the world in which we currently live.
The company is even praised for its moat, with a “narrow” rating from morningstar due to its cost advantage in acetic acids and towing acetate. In terms of leadership, Celanese is in the excellent hands of former shell (rds.b) (rds.a) vice president of global manufacturing, lori ryekerk. morningstar believes this, along with the company’s disciplined capital allocation, small M&A bias, and high shareholder return policy, deserve an excellent rating, and I can’t help but agree with this assessment.
all this makes celanese a definite “buy” in my opinion. I have bought and intend to continue buying this company.
thanks for reading.
Because of the vast undervaluation, I consider Celanese Corporation a “buy”.