Trinseo PLC (TSE, Financial) is a unique small-cap specialty chemical company that operates a product portfolio that brings together plastics and latex binders businesses that share feedstocks, operations, customers and end users. The company was formed in 2010 and was created by combining the technologies and operations of four former businesses of Dow Chemical (which is now Dow Inc. (DOW, Financial)). These included Polycarbonate Compounds & Blends, Paper and Carpet Latex, Synthetic Rubber and Styrenics.
End market users include the automotive, consumer electronics, appliances, medical devices, packaging, footwear, carpet, paper and board and building and construction industries. Trinseo had $4.8 billion of net sales in 2021, 26 manufacturing sites around the world, 16 research and development facilities and approximately 3,800 employees.
The company has been public since 2014 and currently has a market capitalization of $1.7 billion.
Business segments
The company now operates in six distinct business segments.
The first is Engineered Materials. This segment consists of rigid thermoplastic compounds and blends products, soft thermoplastic products, continuous cast plexiglas (PMMA) sheet products and PMMA resins. Products in this segment are typically targeted toward higher-growth and higher-margin applications in consumer electronics, medical, footwear, automotive and commercial building and construction. In 2021, 39% of Engineered Materials' net sales were derived from Europe, approximately 40% were generated in the U.S. and approximately 20% were generated in Asian markets.
Next is Latex Binders. The company is strong globally in styrene-butadiene latex, with leading market positions around the world. It is believed to be the number one market share leader in North American and the number two market share leader SB latex capacity in Europe. The primary end market users are for coated paper and board. Another big end market is for carpet applications and artificial turf. Approximately 48% of the Latex Binders segment's sales were generated in Europe, 27% came from the U.S. and the majority of the remaining net sales were generated in Asia markets across various countries.
The third sement is Base Plastics. This segment consists of an assortment of compounds and blends, the majority of which are used in automotive applications. The segment also includes its thermoplastic polymer, styrene-acrylonitrile (SAN) and PC businesses. In 2021, approximately 63% of net sales from the Base Plastics segment were generated in Europe, 20% were derived from the U.S. and 12% came from Asian markets.
The company's Polystyrene business produces polystyrene with a focus on sales to injection molding and thermoforming customers. Polystyrene is a synthetic aromatic hydrocarbon polymer made from the monomer known as styrene and can be solid or foamed. Its customers use them for applications such as appliances, food packaging, foodservice disposables, consumer electronics and construction materials. Last year, approximately 62% of net sales from this segment were generated in Europe and 38% of net sales were generated across Asia markets.
Next up is the Feedstocks segment. The main function of this segment is the production of styrene monomer in Europe in order to provide secure sourcing of this important raw material to the company’s other segments. Styrene monomer is one of the basic building blocks of plastics and a key input to many of the company’s other product lines.
The final segment is Americas Styrenics. This segment is comprised of the operations of a 50%-owned joint venture with Chevron Phillips Chemical Co., which is the largest producer in North America of both styrene and polystyrene. The company receives dividends from the venture, which totaled $85 million last year and represented about 72% of reported equity earnings.
Financial review
Being a cyclical chemical company, Trinseo was not immune to Covid-19's negative effects on the global economy as many of its end markets were affected. However, 2021 showed a strong recovery in the financial results. Revenue increased 76% due to easy comparables, higher pass-through price increases and the addition of two acquisitions made during the year. Net income from continuing operations was $280 million, which was an increase of $217 million above the prior year, and full-year adjusted Ebitda was $729 million, which was an increase of $444 million above 2020 due to the items mentioned above. All segments contributed to the strong growth in 2021.
In most of the company’s financial history, it has generated strong levels of free cash flow. Free cash flow over the last three fiscal years have been $335 million, $189 million and $238 million.
Trinseo made two major acquisitions in 2021 for a combined total of $1.8 billion, which were mostly funded by new debt issuance. Aristech Surfaces, a global manufacturer of polymethyl methacrylates continuous cast and solid surface sheets, was acquired for $445 million. In addition, Trinseo purchased a large PMMA business from Arkema SA (XPAR:AKE, Financial), a French specialty chemical company. The purchase price was approximately $1.36 billion. According to the company, both acquisitions are expected to be accretive across all financial metrics.
Valuation
Trinseo is selling at very low valuation levels, which is somewhat normal for a specialty chemical company that must deal with both commodity cycles and economic cycles. Often the best time to buy a cyclical chemical company is when the price-earnings ratio is very high or earnings are non-existent, which indicates the cycle is about to turn positive.
Nonetheless, current valuations may be unnecessarily too low at this time. The company’s 2022 guidance calls for net income from continuing operations of about $313 million at the midpoint of the range given and Ebitda of between $700 million and $750 million. Cash flow from operations could be around $555 million with free cash flow in the range of $350 million to $400 million. Consensus earnings per share estimates for 2022 are $8.29 and $8.19 for 2023.
Based on Trinseo’s estimates, the stock currently trades below 5 times Ebitda. That is below most peers, who trade somewhat closer to 6 times Ebitda.
Guru trades
Gurus who have added to Trinseo positions recently include Barrow, Hanley, Mewhinney & Strauss and Hotchkis & Wiley. Gurus who have reduced their positions include Chuck Royce (Trades, Portfolio) and Jeremy Grantham (Trades, Portfolio).
Conclusion
Many of the company’s key product lines have seen significant price spikes recently, including polystyrene. The question is, can the company manage the inevitable price reversal when it happens? These basic supply and demand forces can be affected by energy costs, logistics and macroeconomic issues.
There currently exists a decline in commodity spreads, but demand from most of Trinseo's end markets seem to be offsetting the spread compression. If this dynamic continues, the company should be able to manage the price declines. The current ultra-low valuations reflect investors' belief that price reversals will cause major earnings revisions downward. In any case, the above-market dividend yield and low earnings ratios should provide upside. With the company selling near 52-week lows, there should be downside protection and a built in margin of safety.
