Celanese Corporation (CE, Financial) is a low-risk stock and a member of the S&P 500 that is trading at an incredibly low value compared to its long-term potential, in my view. It operates in a legacy, basic industry underpinning American industrial production with its materials and chemicals. For these reasons, I am bullish on Celanese.
About the company
Celanese manufactures chemicals and materials used is nearly all sectors of the economy. The health of a nation’s economy depends on companies like Celanese, and demand for Celanese's products depends on the economy’s viability.
The corporation operates through four divisions: Engineered Materials, Cellulose Acetate, Food Ingredients and Acetyl Chain. The Engineered Materials unit products are used in automotive and medical applications, industrial products and consumer electronics. Other units manufacture chemicals like vinyl acetate-based emulsions, polyurethanes and polymers. There are products to enhance colorants, paints, adhesives, coatings, pharmaceuticals, construction, glass fiber, carpeting, textiles and paper. Its resins and compounds are used in flexible packaging films, lamination film products, hot melt adhesives and automotive parts.
The pharmaceutical, agricultural and chemical industries also uses Celanese's products. The company sells a chemical sweetener used in beverages, confections, and dairy products, as well as food protection ingredients and chemicals for personal care products.
Based in Texas, Celanese is an American legacy company founded in 1918, meaning it could benefit from the current trend of de-globalization.
Apron strings tied to the market
Celanese's market cap is about $12 billion, which is down significantly after it topped $17 billion just eight weeks ago. Shares are down 30.75% over the past 12 months. In the same time frame, the Dow Jones Industrial Average dropped about 12%.
The company scheduled the release of its second-quarter earnings report for July 27. The consensus among analysts is earnings per share will be about $4.50, which would be down from $5.02 in the year-ago quarter.
Celanese is still up by almost 8% for the last five years. The biggest hit to the stock came in June and can be partially attributed to the general market decline, but Celanese is especially sensitive to the economic situation and can thus suffer in recessionary conditions.
Valuation
My average price target for this stock is $160 per share, which I expect it to reach in the next 12 months.
Celanese has a GF Score of 86 out of 100, driven by high profitability, growth and momentum despite lackluster GF Value and financial strength.
Sentiment is climbing
Corporate insiders own about 3% of the shares in Celanese. They made minimal trades recently. Institutions own the bulk of other shares. The company is currently highly profitable with good growth potential, in my opinion, which could be why insiders aren't panicking. The return on equity is 51.3%. Asset growth is 15.5%. The sentiment in the financial community is moderately strong, with hedge funds buying nearly 8 million shares last quarter.
I do not think inflation will materially hurt Celanese's earnings because its products are not particularly price sensitive. The company is raising prices higher than inflation thanks to strong demand, which is good for the gross profit margin.
According to Celanese's CEO, supplies are more than abundant, so it shouldn't suffer supply chain issues. The company has been producing more goods again to meet demand. The company is also spending $24 million on research and development.
Recognizing risks
The GuruFocus system finds only one moderate risk facing Celanese, but I think there is another to consider.
For one, Celanese has a high cash-to-debt ratio. It does not hold enough cash on hand to pay off its debt. The company has been adding debt to finance its acquisition spree. This is the risk identified by the GuruFocus system.
This year, Celanese is buying a competitor’s materials and mobility business unit for $11 billion. In March, Celanese reported $4 billion of debt and less than $614 million in cash and equivalents. Liabilities are nearly $5 billion more than cash, equivalents and short-term receivables. Its free cash flow has been healthy enough to cover debt. The materials and mobility unit that is to be acquired generated $1.1 billion in Ebitda in 2021.
The financial community seems pleased with the purchase, giving a buy rating to Celanese following the announcement. Short interest is a slight 1.38%.
The other risk I would consider is that basic materials and chemical sales are cyclical. That presents a risk to the pace of growth and earnings. The stock concomitantly is volatile and has a 1.22 Beta.
Final word
I like Celanese for its products, experienced management and attractive forward dividend yield of 2.51%. I think management takes reasonable risks that put the company in an excellent position to benefit from any economic turnaround. Lori J. Ryerkerk, the Chairperson, CEO and President, is a chemical engineer with over 30 years of management experience in the energy industry.
The latest acquisition adds to the leverage, and, while not a significant risk factor per se, more debt adds to the risk to profitability and margins. This is a fearful period of economic slowdown, inflation, a war interrupting energy supplies, rising taxes, falling consumer confidence and rising interest rates. Regardless, Celanese is positioned to capitalize on any economic turnaround in the future. Value investors can thus benefit from the recent share price downturn.
