David Einhorn (Trades, Portfolio) is the founder and president of Greenlight Capital, a value-oriented investment adviser. He believes an investment approach emphasizing intrinsic value will achieve consistent absolute investment returns and safeguard capital regardless of market conditions. He is a noted activist investor, taking positions in companies and then pushing management to implement changes.
Einhorn is long Chemours (CC, Financial). In his September quarter letter, he commented:
“CC jumped from $8.24 to $16.00 after strong earnings driven by the rising price of titanium dioxide (TiO2) and progress on CC’s cost-reduction plan. The market remains concerned about CC’s exposure to legal liabilities related to its legacy Teflon manufacturing. We continue to believe the ultimate liability is manageable and that a recent negative verdict currently under appeal might not stick. In the fluoroproducts segment, our research indicates that profits on CC’s next generation refrigerant Opteon will continue to climb, even beyond the 2017 timeframe management has discussed. Between expanding Opteon profits and a continued rise in TiO2 pricing, we expect CC’s EPS to be in excess of $2.00 in 2017 and to approach $3.00 in 2018.”
Chemours is a leading global provider of performance chemicals. It began operating as an independent public company in July of 2015 after separating from DuPont (DD, Financial). The company has three reporting segments: Titanium Technologies, Fluoroproducts and Chemical Solutions. The company’s Titanium Technologies segment is the leading global producer of titanium dioxide (TiO2), a premium white pigment used to deliver whiteness, brightness, opacity and protection in a variety of applications. Its Fluoroproducts segment is a leading global provider of fluoroproducts such as refrigerants and industrial fluoropolymer resins. Chemours’ Chemical Solutions segment is the leading North American provider of industrial and specialty chemicals used in gold production, oil refining, agriculture, industrial polymers and other industries.
After separating from DuPont, Chemours began making changes to its organization, cost structure and portfolio of businesses to transform into a higher growth chemical company. The objectives of its multi-year five-point transformation plan are to improve the company’s financial performance, streamline and strengthen the portfolio and reduce leverage by:
- Reducing cost through a simpler business model.
- Optimizing its portfolio to focus on its businesses where the company has leading positions.
- Growing market positions where it has competitive advantages.
- Refocusing on its investments by concentrating capital expenditures on core businesses.
- Enhancing organization to deliver its values and support its transformation to a higher-value chemistry company.
Through cost reduction and growth, Chemours expects the transformation plan to deliver $500 million of incremental adjusted EBITDA improvement from 2015 through 2017. Based on its anticipated cost reduction and growth initiatives, management expects an approximately similar improvement in pre-tax income.
So far, the company has done a good job in terms of cost reduction and portfolio optimization. The company’s cost-reduction programs contributed approximately $100 million of year over year savings through the first half of 2016 and is on track to reach the $200 million target for the entire year. The company plans to achieve an additional $150 million in savings in 2017.
In terms of portfolio optimization, the company has completed the sale of its Beaumont aniline facility to Dow (DOW, Financial) for $140 million and closed the $325 million Sulfur transaction with Veolia (XPAR:VIE, Financial). Chemours remains on track to complete the divesture of its Clean and Disinfect business to Lanxess (XTER:LXS, Financial) for $230 million during the second half of 2016. Total gross proceeds from these three divestures will be approximately $695 million, reflecting 10 to 12 times EBITDA multiple on those businesses. Despite EBITDA loss, the impact of the sale of these business on free cash flow is expected to be minimal as these businesses were highly capital-intensive in nature. In addition to divesting the three businesses, the company is also closing its Reactive Metals business in Niagara, New York.
The company is doing a good job in terms of ramping up its Opteon product line. Market adoption of Opteon was much stronger than initially expected. While European original equipment manufacturer's customers are adopting this environmentally friendly refrigerant to meet regulatory requirements, North American customers are taking advantage of carbon tax credits via corporate average fuel economy (CAFE) standards by using Opteon. The company expects steep growth trajectory of Opteon during the second half 2016 and through 2017.
In addition to the company’s transformation efforts and good execution, Chemours’ EPS and share price is also expected to benefit from recovering titanium dioxide cycles. The company implemented a 5% pricing increase in the second quarter with further improvements expected when the company reports its third quarter results.
Going forward, sell-side analysts are expecting the company to post an EPS of $1.44 in the next year, giving it a forward price-earnings (P/E) multiple of 11.3x. Einhorn is even more bullish on the company’s recovery and transformation initiatives and expects Chemours to post an EPS north of $2 in 2017, implying a forward P/E multiple of 8.2x.
Chemours is a good buy at current valuation given its low P/E multiple, prospects of recovery in the titanium dioxide cycle and the company’s portfolio optimization and cost reduction initiatives.
Disclosure: I have no positions in any stock discussed in this article.
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