Among the many stocks that were slapped by last year’s price reversals was Celanese Corporation (CE, Financial). I wanted to know if the current price signifies that something is wrong with the company, or whether it was just another good name caught up in a market-wide downdraft.
About Celanese
Irving, Texas-based Celanese specializes in chemicals and specialty materials. Its roots go back to 1918, and the current company was incorporated in 2004.
According to its 10-K for 2021, it operates through three business segments: Engineered Materials, Acetate Tow and Acetyl Chain:
Engineered Materials consists of both engineerd mechanical parts for various industries and the food ingredients business. It sells its products mainly to original equipment manufacturers and their suppliers in the automotive, medical, industrial and consumer industries.
Acetate Tow is a producer and supplier of acetate tow and acetate flake, which are used in filtering products. Acetate tow, based on wood pulp, is used mainly in cigarette filters.
Acetyl Chain refers to “the integrated chain of intermediate chemistry, emulsion polymers, EVA polymers and redispersible powders businesses, is active in every major global industrial sector and serves diverse consumer end-use applications.” End products include water-based paints, adhesives, paper coatings, polyesters and textiles. This segment is the biggest contributor to revenue and earnings per share.
Celanese has operations globally, and as a result can experience negatives from currency exchange rates.
Competition
Competitors vary by segment and include Ajinomoto Co, Inc. (AJINY, Financial), BASF SE (BASFY, Financial), Daicel Corporation (DACHF, Financial) and Arkema SA (ARKAF, Financial).
Celanese lists its competitive advantages as its global assets and resources, marketplace presence, broad materials portfolio and differentiated capabilities.
Those advantages have been strong enough for it to keep up with the S&P 500 and to stay ahead of the Dow Jones U.S. Chemicals Index in terms of share price gains:
Financial strength
Celanese receives a 5 out of 10 ranking for financial strength from GuruFocus, based on the following factors:
The company carries significant debt, and that’s reflected in the red bars showing it fares worse than most companies in the chemicals industry.
Its short- and long-term debt add up to $12.337 billion, compared to revenue of $9.600 billion, for a ratio of 1.29 (all figures based on trailing 12-month data). The company has cash and cash equivalents of $9.671 billion.
The Altman Z-Score of 2.58 means it is in the grey area, between the distress and safe zones.
Given that cash and revenue are both strong, I am not concerned about the company getting into financial trouble.
Profitability
Celanese gets a high mark of 8 out of 10 for its GuruFocus profitability rank. That’s based on its operating margin, the trend of the operating margin, its Piotroski F-Score, the consistency of its profitability and its predictability rank:
As the table shows, the company has an industry-leading operating margin. It’s also a volatile margin, but one that has trended upward over the past 10 years:
CE Data by GuruFocus
The Piotroski F-Score comes in at 6 out of 9, which is a good result, so we know the company manages its finances well. It’s a different story for its predictability rank, with a ranking of just 1 out of 5.
Earnings have hardly been consistent, but if we ignore that one big quarter in 2021, it looks reasonably smooth:
CE Data by GuruFocus
Profits at Celanese have been volatile, but they’re mostly going in the right direction.
Growth
Revenue, Ebitda and EPS without NRI have all grown at Celanese, but with a great deal of volatility. This is a 10-year chart of revenue:
CE Data by GuruFocus
There’s little consistency on the Ebitda chart:
CE Data by GuruFocus
Note the spike in the Ebitda and EPS without NRI charts. As the company reported in its fourth-quarter 2020 earnings release, it “closed the transaction to monetize the Company's equity investment in the Polyplastics JV for cash proceeds of $1.6 billion.”
Free cash flow also has its bumps up and down:
CE Data by GuruFocus
The company noted in its 10-K,
“Furthermore, some of the industries in which our end-use customers participate, such as the automotive, electrical, construction and textile industries, are highly competitive, to a large extent driven by end-use applications, and may experience overcapacity, all of which may affect demand for and the pricing of our products. In addition, many of these industries are cyclical in nature, thus posing risks to us that vary throughout the year. The occurrence of any of these events may adversely affect our cash flow, profitability and financial condition.”
Summing up its growth profile, I would argue the company has grown over the past decade, but in such a volatile way that investors might miss the bigger picture. Surprisingly, the share price is less volatile.
Dividends and share repurchases
Celanese currently has a dividend yield of 2.23%, which is higher than the S&P 500's average of 1.67%. That’s based on the Jan. 26 stock price of $121.47.
It has consistently raised its dividend per share payments over the past decade at at an average rate of 21.89% per year:
CE Data by GuruFocus
Despite the increases, the dividend payout ratio is relatively low at 18%, leaving lots of room for future hikes.
The company has also bought back shares aggressively over the past decade, reducing the count by an average of 4.28% per year.
Valuation
The 10-year price chart makes Celanese look undervalued, although it has recovered somewhat from the market-wide slump of 2022:
CE Data by GuruFocus
The company remains well below its previous highs and its trendline.
The GF Value chart goes further and calls Celanese significantly undervalued. Its estimated intrinsic value of $205.05 is $80.58 higher than the Jan. 26 closing price of $121.47:
The price-earnings ratio also points to undervaluation at 8.03, which is roughly half the chemical industry’s median of 16.03.
Divide that ratio by the five-year average Ebitda growth rate of 20.30% and the PEG ratio is 0.39. That’s well below the fair valuation mark of 1.00.
Gurus
Warren Buffett (Trades, Portfolio) of Berkshire Hathaway (BRK.A)(BRK.B) leads the 11 gurus holding positions in Celanese. After adding more shares in the third quarter of 2022 according to his latest 13F, he owned 9,710,183 shares. That’s good for an 8.96% stake in Celanese and represents 0.30% of Berkshire Hathaway’s third-quarter 13F holdings. Dodge & Cox held 7,424,644 shares and Jim Simons (Trades, Portfolio) of Renaissance Technologies owned 708,209 shares at the end of the third quarter.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
Institutional investors own 93.05% of the company while insiders hold another 3.01%.
Conclusion
I believe most signs point to Celanese being a good company at a great value that simply got caught up in a bad market. The company’s fundamentals are strong and the price seems right.
