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S&P Capital IQ


07/18/16 10:00:07 AM



This week's Focus Stock of the Week is Celanese Corp (CE: $70.57) which carries S&P Capital IQ's highest investment recommendation of 5-STARS, or Strong Buy. Celanese Corp. is a global producer of industrial chemicals and has the number one or two market share in a majority of its products. In 2015, 74% of sales were derived from facilities outside the U.S., including 31% in Germany, 14% in China, 12% in Singapore, 7% in Belgium, 10% in the rest of the world. Celanese is a leading global producer of high performance engineered polymers that are used in a variety of high-value applications and one of the world's largest producers of acetyl products. Celanese's four business segments include Advanced Engineered Materials, Consumer Specialties, Acetyl Intermediates, and Industrial Specialties.

The Advanced Engineered Materials segment (22% of 2015 segment sales and 42% of segment operating profits) supplies high performance specialty polymers that have chemical and physical properties that enable them to perform in a variety of conditions. These include enduring elevated temperatures, resisting adverse chemical interactions with solvents and withstanding deformation. Most of the segment's products typically used in a wide spectrum of applications, are resistant to cyclical price swings.

The Consumer Specialties segment (16%, 46%) includes the cellulose derivatives and food ingredients businesses, which serve consumer-driven applications. The cellulose derivatives business produces acetate flake, which is then processed into fiber tow, and is used in filter products, primarily for cigarettes. Its food ingredients business is a leading international supplier of premium quality ingredients for the food, beverage and pharmaceutical industries.

The Acetyl Intermediates segment (45%, -1%) produces acetyls including acetic acid, vinyl acetate monomer, acetic anhydride and acetate esthers, which are used in adhesives, paints and films. Acetyl products were 31% of total sales in 2015. The segment also makes solvents and intermediates, including formaldehyde and amines, for use in agricultural and chemical products.

Its Industrial Specialties segment (18%, 13%) produces emulsion polymers and ethylene vinyl acetate (EVA) emulsion polymers. The emulsion polymers business is a leading global producer of vinyl acetate-based emulsions, used in paints, coatings, and adhesives, among other things. The EVA emulsion polymers business is a leading North American manufacturer of specialty EVA resins and compounds and select grades of low-density polyethylene.

While slowing demand and oversupply, driven by overcapacity in China, has led to lower prices in the acetic acid industry, we think Celanese's low cost position and strong market share ensures that its acetyl chain businesses will remain profitable. Chinese overcapacity for acetate tow is also pressuring volumes and prices. Celanese has reduced some acetate tow capacity to compensate. Strong growth in its engineered materials business is likely to continue as specialized high margin products are designed to meet customer needs. Additionally, Celanese believes it can achieve annual savings of between $50 million and $100 million.

Celanese expects to reduce capital spending levels from the $350 million to $400 million range to the $250 million to $300 million range as several large projects are completed. This should lead already strong free cash flows even higher. We expect Celanese to use cash for reinvestment into the business, accretive acquisitions, share repurchases, and dividends. In 2015, Celanese repurchased $420 million shares, lowering share counts by 6.6%, and $1.03 billion remains under its current authorization as of March 31, 2016. Celanese increased its dividend by 20% in 2016 and 2015, 39% in 2014, and 100% in 2013. We see a dividend payout ratio of 23% in 2016 and believe that Celanese may slow the pace of its dividend increases to match earnings growth in coming years.

EBIT totaled $1.24 billion in 2015, $1.27 billion in 2014 and $1.06 billion in 2013, with corresponding EBIT margins of 21.8%, 18.6% and 16.2%. We see EBIT margins rising in both 2016 and 2017, reaching nearly 23% in 2017. Cost reduction efforts and higher strong growth in its more specialized products should boost margins, in our view. We see higher interest expense in 2016 and 2017.

Our 2016 recurring EPS estimate, excluding $0.10 of net nonrecurring charges, is $6.32, up 9.6% from 2015's $6.02, which excludes $4.02 of net nonrecurring charges. We forecast 2017 EPS of $6.87, up another 11%.

Celanese recently traded at 10.3X our 2017 EPS estimate, or nearly a 45% discount to its specialty chemical peers. Our 12-month target price of $82 is 11.9X our estimate, or about a 40% discount to our peer target, warranted by our projection of a below-peers three-year EPS growth rate and its exposure to the more cyclical acetyl business, partly offset by an above-peers dividend yield and its demonstrated ability to grow earnings and cash flows in a difficult business environment.

Risks to our opinion and target price include changes in economic conditions, plant availability, raw material costs and interest rates.

S&P Global Market Intelligence's views on stocks are constantly re-evaluated. Please refer to our most recent publication on this stock to see our current view.


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