I continue to maintain that the 2023 stock market will look a lot like the 2022 stock market.
Big tech continues to reel from overspending during the pandemic, and are being forced to fire large numbers of employees to cut costs.
Meanwhile, America’s more traditional mid-cap companies in dull sectors like manufacturing—which have had to deal with supply chain constraints and a host of ballooning costs over the past two years—are coming to the fore as good buys.
One such boring sector in manufacturing is the chemicals sector, and this company in particular…
The chemicals industry continues to benefit from its raw materials being available in abundance. This is due to the U.S.’s own ample supply of feedstock, like natural gas from the Permian Basin. A key point to bear in mind here is that the industrial base in the U.S. has suffered far less from energy price inflation than its competitors in Europe and Asia, thanks to America’s transition to being a net energy producer in 2019.
Let me now go into greater detail about one company in the chemicals sector, Celanese Corp. (CE).
The company, based in Irving, Texas, is the world’s largest producer of acetic acid and its chemical derivatives, including vinyl acetate monomer and emulsions. Celanese produces these commodity chemicals in its acetyl chain segment (roughly 45% of 2022 pro forma EBITDA, including acquisitions), which primarily serves the automotive, coatings, building and construction, and medical end markets, with 64 different products.
In simple terms, if you need anything to do with acetates, then Celanese can make it for you.
The price of natural gas is crucial when considering whether to invest in Celanese.
Luckily for the company, while natural gas input prices initially rose sharply in 2022, the crash back to lower levels has been rather swift. And, here in the U.S., we have a secular long-term trend of lower natural gas prices.
If you chart the trend for natural gas prices, you will see a clear inverse correlation with Celanese’s stock price—when gas prices are lower (as they are currently), then Celanese’s share price rises.
The result is that Celanese is sitting in the perfect spot at the moment because the producer price index for its core output has risen to a 30-year high! In essence, the company’s production costs are cratering just at the point when its products are fetching premium prices, and investors have begun to take notice.
The company was able to push through substantial price increases, at an average of 15%, at the end of 2022. Currently, its operating margins are running two percentage points above the five-year average of 24%, suggesting that the company’s pricing power is improving.
Celanese’s major plant, in Clear Lake, Texas, benefits from a cost advantaged feedstock from that low-cost, American, natural gas. That’s why the company plans to expand acetic acid production capacity at Clear Lake by roughly 50%, which should benefit segment margins thanks to lower unit production costs relative to competitors in Europe and Asia.
And here’s another nice plus to consider: Warren Buffett’s investment vehicle, Berkshire Hathaway Inc. (BRK.A or BRK.B), added to its existing holding in Celanese during the last quarter. I suspect that was a bet on the strength of the U.S. economy. In total, Berkshire now owns 9% of Celanese’s free float.
I believe the trend of Celanese’s profit margins increasing will continue for the foreseeable future. One reason is due to the strategy being implemented by the company’s management, including the Clear Lake expansion project.
Another is the engineered materials segment (45% of 2022 EBITDA), which produces specialty polymers for a wide variety of end markets. Celanese is investing in the expansion of this business through acquisition.
Celanese already completed, in November 2021, a $1.15 billion purchase from ExxonMobil Corp. (XOM) of its Santoprene Thermoplastic Vulcanizates (TPV) elastomers business. This company is a leading global producer of TPV, serving a variety of end-uses including automotive, construction, appliance, medical, and industrial. TPV is a chemically cross-linked, high-performance material that leverages a unique combination of engineering thermoplastic and elastomer properties.
In November 2022, Celanese completed the acquisition of most of the chemical giant Dupont de Nemours Inc.’s (DD) mobility and materials business for a total of $11 billion, a sales price roughly eight times cash profit.
The key point here is that this business offered Celanese a large niche in the polymers market for cars and other vehicles. The beauty of this is that it doesn’t really matter, whether the vehicle is a fossil-fuel driven one or an electric vehicle. The demand for materials not connected with the propulsion system stays exactly the same. And the former DuPont business has put a lot of effort into showcasing polymers specifically aimed at the electric vehicle market.
Going forward, the engineered materials segment should generate the majority of its total revenue. The automotive industry will account for the majority of this segment’s revenue, while other key end markets include electronics.
And yet, the stock is still very cheap.
Celanese’s stock trades at an historically cheap forward price/earnings (PE) ratio of 8.4, according to FactSet consensus. And that number could rise to 10, as the impact of the DuPont divisional acquisition feeds through the earnings statement.
That makes Celanese a well-priced and operationally geared play on both U.S. energy independence as well as economic strength. The stock is up 10% year-to-date.
Add to that a decent dividend—current yield is 2.4%—and you have a solid buy here. The company has a pattern of raising its dividend every year for the last 14 years and I expect 2023 to be no different. Celanese should have sufficient cash flows to pay down its debt and slowly grow its dividends.
Buy CE in the $105 to $125 range.
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