Celanese Corp

A diversified specialty chemicals company

Key Data

• Ticker Symbol: CE 0.00%↑

• Price: $114

• Market Cap: $12 Billion

• Forward Dividend: $2.80

• Dividend Yield: 2.4%

• Payout Ratio: 15%

• Areas of operation: Worldwide

• Sector: Basic Materials - Specialty Chemicals

Business

As per their investor relations website:

Celanese Corporation is a global technology leader in the production of specialty materials and chemical products which are used in most major industries and consumer applications. Our products, essential to everyday living, are manufactured in North America, Europe and Asia. We are one of the world’s largest producers of acetyl products, which are intermediate chemicals for nearly all major industries. We are also a leading global producer of high performance engineered polymers that are used in a variety of high-value applications.

CE 0.00%↑ essentially produces a whole bunch of different specialty chemicals that are used for all sorts of things from direct usage in sanitary equipment, to catalysts, to petro-chemical production.

The company operates worldwide to clients in many different industries. They operate 61 global production facilities and an additional 19 strategic affiliate production facilities, employing over 13 thousand people worldwide.

The company has only recently (December 31st 2022) reorganized its operating and reportable segments to align with the recent structural and management reporting changes.

The company now operates through 2 business segments:

• Engineered Materials

• Acetyl Chain

Let’s go through each of these segments step by step:

Engineered Materials

Engineered Materials is a project-based business where growth is driven by increasing new project commercialization from the pipeline.

The company’s materials portfolio offers differentiated chemical and physical properties that enable them to perform in a variety of conditions, including a range of temperatures, resisting adverse chemical interactions and withstanding deformation. 

These value-added applications in diverse end uses support the business’ global growth objectives and provide enormous value to its clients, while contributing roughly 40% of the company’s revenues.

While the underlying business may be simple, and easily replicated by competitors, what is not easily replicated is the breadth of offerings and the intimate and unique customer engagement that allows CE 0.00%↑ to work across the entirety of its customers value chain. 

For example in the automotive industry the company works with the original equipment manufacturers as well as system and tier suppliers and injection molders in numerous areas, including polymer formulation and functionality, part and structural design, mold design, color development, part testing and processing. 

This broad access allows the business to create a demand pull for its solutions, driving up additional business and further entrenching CE 0.00%↑ into its customers supply chain and product development pipeline.

Because Engineered Materials is a project-based business focused on solutions, the pricing of products in this segment is primarily based on the value-in-use and is generally independent of changes in the cost of raw materials. Therefore, in general, margins may expand or contract in response to changes in raw material costs.

In late 2022 the company acquired a majority of the Mobility & Materials business of DuPont Nemours, Inc..

This acquisition that cost $11 billion in cash and which was funded entirely by the issuance of new debt means that the CE 0.00%↑ has now acquired a leading global producer of engineering thermoplastic and elastomers, as well as numerous specialty materials

This acquisition includes:

• A global production network of 29 facilities, including compounding and polymerization

• Customer and supplier contracts and agreements

• Industry-leading intellectual property portfolio including approximately 850 patents with associated technical and R&D assets

• Approximately 5,000 highly-skilled employees across the manufacturing, technical, and commercial organizations

And is expected to generate an additional $4.00 per share in earnings once full synergies are achieved by 2026.

The purchase was fully funded by debt, with the $10.5 billion in permanent financing for the acquisition having a net borrowing rate of approximately 5.4%.

This acquisition essentially quadrupled the company’s long term debt, and has swollen its asset base with a substantial amount of goodwill, which is not something I usually like seeing, but it will also get rid of a major competitor and if all goes well provide a substantial boost in earnings and double the company’s free cash flow within the next 5 years.

The company has already mentioned that they will prioritize deleveraging over the next 2 years to face up against this, so we shouldn’t expect significant amounts of cash being delivered to shareholders via buybacks (though I don't expect the dividend is in any danger).

Acetyl Chain

The Acetyl Chain segment, which includes the integrated chain of intermediate chemistry, emulsion polymers, EVA polymers, redispersible powders, and acetate tow businesses, is active in every major global industrial sector and serves diverse consumer end-use applications. These include traditional vinyl-based end uses, such as paints and coatings and adhesives, as well as other unique, high-value end uses including flexible packaging, thermal laminations, wire and cable, and compounds.

The company is a major producer of acetic acid and its patents and infrastructure enable it to produce vast quantities of these chemicals at a substantial cost advantage over its competitors, allowing the company to have global growth opportunities through low cost expansion.

Margins here are substantially higher than in the engineered materials segment.

The company-s intermediate chemistry business sells its products both directly to customers and through distributors. The company has long standing relationships with most of its customers and many of them are under multi/year contracts enabling “stickiness” in the business.

The company prices its products based on industry utilization, changes in raw materials cost, sensitivity to demand and the value-in-use, therefore the impact to pricing typically lags changes in raw material costs over months or quarters, impacting profitability.

The company also has a number of partnerships and equity investments which contribute a substantial amount of earnings and cash flows:

Management

Lori J. Ryerkerk is the Chairman, CEO and President of Celanese Corporation, having been appointed to the position of CEO in May 2019 and named chairman in April 2020.

She’s an outside hire coming from Shell Downstream Inc. and having vast experience in the petro-chemical industry. Her tenure so far has seen positive results but it’s difficult to differentiate the quality of her management from the massive macro-economic factors that have been at play these past couple of years.

I believe the Dupont Acquisition will really be the true test to see whether her tenure will have been successful or not, but the results of that will only become apparent in a few years.

The company’s insider trades are generally positive with a couple of SVPs making significant purchases over the past year or so.

As Peter Lynch said:

There’s plenty of reasons to sell a stock, but only one reason to buy

Key Risks and Opportunities

Risks:

• Substantial exposure to raw material prices

• Somewhat cyclical industry at the top of a cycle

• Major acquisition whose success is not guaranteed

Opportunities:

• Highly Diversified Business 

• Potential catalyst in the form of the DuPont acquisition

• Long standing relationships and deep integration in clients business means a moat exists

Financial Data:

Shareholder Returns:

• Dividends

  • The company pays a $2.80 dividend.

  • The company has increased it dividend yearly for 13 years.

  • The company has increased it’s dividend over the past 5 years at a 7% CAGR.

• Share Buybacks

  • The company has suspended buybacks in order to deleverage

  • The company has regularly conducted buybacks in the past

  • Shares outstanding have reduced by 5% a year over the past 5 years

Income Statement:

• Revenue Growth Rate

  • Long Term - 4.7% 

  • 3 Year - 71%

  • I would expect revenues to decrease substantially in the near future, though likely not to 2020 levels.

  • The 3 year growth rate results from a heavily depressed 2020, and a booming 2022. It’s not reliable.

• Pre-Tax Profit Margins

  • Long Term - 21%

  • Highly cyclical ranging from mid single digits to mid 20s

• Return on Assets

  • Last Year - 7%

• EPS Growth Rate

  • Long Term - 25%

  • 3 Year - 3%

  • The long term rate is deceptive due to a depressed 2012 and a booming 2022 (cyclicals!)

• Cyclicality

  • Cyclical

Cash Flow Statement:

• Operational Cash Flow Growth Rate

  • Long Term - 11%

  • 3 Year - 35%

  • Fairly stable even through cycles

• Investing Cash Flows Growth Rate

  • No major capex beyond acquisitions

  • Past 2 years -> $12 billion in acquisitions which may be good or bad!Did they overpay?

• Financing Cash Flows Growth Rate

  • Substantial increase in debt the past year, but reasonably stable prior

  • Regular capital returns to shareholders

Balance Sheet:

• Assets:

  • Assets more than doubled the past year with a substantial part of the increase being goodwill

  • Current assets also doubled due to increased cash on hand, accounts receivable and inventory

• Liabilities:

  • The majority of the liabilities comes from the financing for the DuPont acquisition.

  • Some minor current liabilities mainly accounts payable and short term borrowings

• Debt:

  • Substantial debt repayments through 2027, the majority of which can be repaid from operating cash flow (assuming it remains steady)

  • Some refinancing will be necessary though

Valuation:

Key Metrics:

Bullish

• Discounted Earnings - $328

• Discounted Cash Flow - $213

• Margin to PE - $798

• Market Multiple - $347

• Cash Multiple - $238

• NCAV - $56

Bearish

• Discounted Earnings - $79

• Discounted Cash Flow - $51

• Margin to PE - $247

• Market Multiple - $110

• Cash Multiple - $77

• NCAV - $0

Average

• Discounted Earnings - $194

• Discounted Cash Flow - $126

• Margin to PE - $458

• Market Multiple - $255

• Cash Multiple - $158

• NCAV - $0

Expected Value:

The valuation that’s closest to reality is probably the Average Discounted Earnings valuation, since we’re buying this company for the earnings it generates, and there are no meaningful barriers to its continued growth, and the company appears to have a solid built-in moat to its business model.

That said, when we aggregate all Average valuations into a single average value we expect a fair value of $199.

Assuming a 30% margin of safety, I would expect that the company would be a somewhat secure investment at $139 per share.

This would provide a 2% dividend yield.

Investment Thesis

• The company provides key products to a variety of industries and highly diversified

• The company is deeply integrated in its clients operations providing a sticky moat

• The DuPont acquisition may provide a good catalyst for the business growth, and reduces the impact of a major competitor

• The large jump in debt is an issue, but they have the ability and willingness to pay it down.

• Profit margins are all over the place, but the company is reliably profitable

• The company will pause buybacks, but will likely continue to increase dividends

• It looks to be slightly undervalued at the moment, assuming it maintains existing earnings.

• Even if earnings are cut in half due to a downcycle (likely) it will still provide a decent earnings yield

Decision

Current Stance: Buy

I mean to open a position in CE 0.00%↑ in the future. I’ve long been looking for a business in the specialty chemicals sector that would fit my criteria, and CE 0.00%↑ certainly does.

I’m also close to my desired portfolio balance of 60% indexes + 40% individual issues, and when i reach it, CE 0.00%↑ will be on my shortlist . That said, I do want to cut down on the number of positions that I have, so I may look to sell some of my existing positions in the near future…

Overall for CE 0.00%↑ though I feel that the risk reward here is worthwhile, I suspect the DuPont assets will neatly fit in to the business, and provide a decent amount of growth. While it’s likely that the business will have a slight downturn in the next couple of years, I think that in 5 to 10 years the company will likely be in a much better position to return capital to shareholders.

In the meantime, the 2.4% (and growing!) yield is reasonably safe, and provides a nice buffer and return for the wait.

If you’d like to find out more about how I first found the company, check out my previous blog post where I use Stockopedia to narrow down my search and define my screening criteria.

If you’d like to try stockopedia yourself, just use my partner link to get access to a free trial.

Do you have a different view on the company? Are you buying, selling or holding?

Let me know down below!