Stock Idea #2 - Celanese Corp ($CE) | Chemical Giant Down 50% with Huge Potential?
Celanese first look investment thesis.
After Celanese's 50% tumble do they have multi-bagger potential?
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The Plan
What does Celanese do?
Are they interesting at these levels?
Summary
What does Celanese do?
Celanese Corp was founded in 1918 and is headquartered in Texas. Currently they operate in 58 global production facilities. They make a wide variety of products, materials, and chemicals through their two operating segments. Engineered materials and acetyl chain.
Engineered Materials (56% of Revenue)
This segment focuses on project-based business. Customizing products to meet specific customer needs. Their offerings include fuel system components, automotive safety systems, medical devices, electronics, appliances, industrial products, battery separators, conveyor belts, filtration equipment, coatings, and electrical applications.
Acetyl Chain (44% of Revenue)
This segment manufactures chemicals to sell either externally or downstream to their own businesses for further production. Broken down further this segment includes intermediate chemistry, emulsion polymers, EVA polymers, RDP, and acetate tow businesses. These products are used in diverse applications such as paints, pharmaceuticals, agriculture, and construction.
Celanese serves nearly every industry, meaning its growth depends on global manufacturing and goods consumption. When manufacturing thrives, so does the company.
Is Celanese interesting at these levels?
When searching for opportunities I like to find companies down significantly from all time highs. It was that starting point that got me interested in Celanese.
This drop is from fears of weakness in demand and a large debt load. But just being down 58% though is not enough for me to buy. I am looking for a quality company that will grow over time and has competitive advantages. To look a little deeper first let’s look at their financials.
The company’s debt levels jump out right away. They recently acquired the Mobility and Materials segment of Dupont’s business for $11 billion which they took on as debt. That combined with falling FCF margins puts them in a precarious position.
The M&M business they acquired generated $5 billion in revenue in 2021 and $1.08 billion in EBITA. That is about 20% EBITA margins which was lower than Dupont as a whole at 26% in 2021. Taking that logic to FCF margins, Dupont’s total FCF margin was about 11% in 2021 so a safe bet for their M&M segment is likely around 8%.
This means if revenues stay flat the acquisition will generate an additional $400 million in FCF for Celanese. Likely ramping up to that full level in 2026 when integration is complete.
Note that the company states they can create run-rate synergies of approximately $450 million. Companies state things like this all the time and they often do not happen. I will essentially assume the business stays the same to be conservative. I would love to be proven wrong though!
The additional FCF from the acquisition makes things feel a little better. But with the integration already starting they would still need more than 15 years of the TTM FCF to pay off their debt. A warning sign that they could have some solvency issues so let’s look a little closer at their debt and when it is due.
Their debt is spread out across the next 9 years however the next 3 years have the bulk of their debt coming due. With only about $800 million in cash on hand and a slowdown expected, the $6.3 billion due in the next 3 years is daunting. So what are they doing to address the situation?
Here are a few actions they are taking according to their Q3 earnings call:
Idling production facilities in every facility and driving cash generation through an expected $200 million inventory release in the fourth quarter.
Cost reduction programs expected to realize $75 million in savings during 2025.
Lowering capital expenditures to $400 million in 2025. ($570 million in 2023)
Taking a term loan available for $1 Billion to pay the $1.3 Billion of debt maturing in 2025.
Cut dividends by 95% starting 2025. (Saves about $285 million.)
These are some good first steps and leave them with only $300 million of debt to pay in 2025. However if the global manufacturing industry continues weakening their FCF could fall.
You can see in the chart below the dip in global manufacturing that started the middle of 2024.
Lets make some assumptions here just to work through if Celanese can weather this storm or if things look shaky. Any investment I make should feel obvious. If I can make basic assumptions and things make no brainer sense then it could be worth adding.
Keep in mind in the TTM they generated about $840 million of FCF and have about $800 million on their balance sheet.
First lets assume that 2025 FCF will stay low around $800 million due to weakening global manufacturing. This is even after the changes made by management to become more lean and cut costs. Along with realizing more FCF for their M&M acquisition.
After paying off the $300 million due they could potentially reduce 2026’s debt by $500 million. Bringing it to $1.0 billion. They will likely use some of their cash on hand to pay that down further so lets assume in 2026 they have $500 million in cash and only owe $700 million for the year.
In 2026 I would expect their FCF can improve to a level of $1 billion. At that level they can pay off all of 2026’s debt and make a small dent in 2027.
Even after paying off $300 million 2027 comes and they have $3.14 billion coming due. Yikes! Assuming their FCF improves further to $1.2 billion and they use all of the cash and FCF to pay things down they still owe $1.44 billion.
This scenario tells me they will need to lean on refinancing and selling off assets to get their debt down. If they can get past 2027 and 2028 though they will have payments of less than $1.4 billion due per year which is far more manageable.
In their recent earnings call they did discuss that they are looking at possible divestitures of various sizes to bring down leverage. If they are able to complete something it could really help their position here although that could also affect their FCF levels.
Another point to make here is that Celanese has a solid credit rating that should give them refinancing options. And with interest rates coming down if they do refinance they may be able to bring down those interest rates slightly.
Summary
Celanese made an acquisition at exactly the wrong time here. They now face a concerning debt pile. And global manufacturing slowdown driven by geopolitical tensions, policy changes, and inflation.
However if they can cut costs aggressively and explore divestitures or refinancing. As long as the world does not enter a deep recession I suspect they will be able to come out the other side generating record FCF as manufacturing improves.
The business underneath the debt load is one of quality. The money they invest in their business gets solid returns and they have great economies of scale. I would also say management has done a decent job of returning money to shareholders through buybacks and dividends over the years. Which will likely resume after they deleverage.
Once the business returns to normal it wouldn’t be surprising to see them generating more than $1.5 billion in FCF depending on the divestitures they make and trading at 12x FCF. Pretty solid for a company trading at a market cap of $8.2 billion and the potential to grow to $18 billion in the coming years.
BONUS
I am putting this stock on a watchlist for $60 a share. If prices fall to that level I will take a more in depth look at how they match up against competition. Along with potential catalysts to boost global manufacturing.
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Disclaimer: This content is for informational and entertainment purposes only. The opinions expressed are my own and not professional financial advice. I do not know your personal financial situation. Please do your own research and consult with a licensed financial advisor before making any investment decisions. Investing involves risk, including the potential loss of principal.
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