Celanese (CE) reported strong earnings once again today, yet shares are down 5-6%. This dip may present a solid buying opportunity for investors.
While I don't have time to review the earnings release in depth, I'd like to highlight three issues I see as key to driving value for shareholders going forward.
First, as highlighted on slide 14 of the earnings presentation, is the company's increasing capital returns. Specifically, focus on their opportunistic share buybacks:
I've previously outlined why I believe Celanese is undervalued; Credit Suisse takes the same position. The fact that the company believes purchases at an average of $51.38 were "opportunistic" confirms that they believe so as well. As of this moment, the stock is trading right above this price. Consequently, investors have the opportunity to purchase shares at a price at which management will likely be buying many more; these repurchases will be accretive given the cheap valuation.
The second issue is pension accounting. One "albatross" around the company's neck is its supposedly large pension shortfall, which should be viewed as a liability similar to long-term debt for valuation purposes. It is my belief that the supposed pension shortfall, for Celanese and many other companies, is substantially overstated. Those performing first-level analysis are likely to accept the prima facie value of the shortfall, but in reality, a large portion is attributable to discount rates. AT&T recently reported a $7.6B non-cash gain on mark-to-market pension accounting, and this may not be the last. Celanese reported a mark-to-market gain as well (though I didn't break down whether portfolio gains or discount rates was the main driver). Regardless, the broader trend will continue to prevail: as their pension shortfall continues to diminish in book/GAAP value closer to what I would peg as its "real" value, the balance sheet will look more attractive to investors.
The final and most important point investors should recognize is that Celanese is, once again, delivering strong earnings growth from internal initiatives, as demonstrated in the slide below.
Back of the envelope math suggests this incremental $100M, divided by 157M shares out, results in an incremental $0.60 or so in EPS. This is consistent with the company's long-term projection of low-double-digit (12-13%) CAGR in earnings. My analysis suggests there is potential upside beyond this - a small amount due to incremental accretion from buybacks, and a larger amount from broader macro growth. Multinational CEOs have largely been more confident on the state of the macro this earnings season, and Celanese CEO Mark Rohr confirmed on the conference call that the projected contributions in the slide above are mostly GDP-agnostic. In other words, if end markets strengthen significantly, Celanese could report significantly higher earnings.
Ultimately, it was a solid quarter, and management should not be punished for conservative, honest guidance that is in-line with the company's long-term objectives. Celanese is a well-managed company with a strong technology platform selling at a material discount to fair value. I have added to my position on the pullback and may continue to increase my position if shares remain at depressed levels.
Disclaimer: This is solely my opinion, not an investment recommendation or solicitation, and may not represent the views of my employer(s), associates, or other related parties. No guarantees made to accuracy or completeness. I am long the companies mentioned in the disclosure and may change my position at any time without notification. Please see the full disclaimer in my profile, and do your own due diligence before making any investment.