Celanese Upgraded To Hold, Appears To Have Bottomed

Aug.16.12 | About: Celanese Corporation (CE)

We have upgraded our rating on Celanese (NYSE:CE) from Sell to Hold after the price has decreased and appropriately priced in 2012 weakness. We slashed our targets for the year as the company underperformed even our expectations. We have dropped our operating income target for the year from $705 million to $620 million for 2012, as well as slashed the rest of our estimates by 5%-10% through 2016.

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Additionally, the company saw its shares increase 3 million, which has hurt equity value. We increased our price target, however, as our discount rate was decreased due to what we see as the end of cyclical weakness and diminished volatility for the company moving forward. Additionally, we saw our price target increase due to a strong decline in capital expenditures. That decline has helped increase equity value as well. The value is strong for the company now with a sub-10 P/E.

Outlook

The company seems to believe weakness will continue for the rest of the year. At the same time, the end of a weak Asian growth phase along with European weakness for chemicals seems to be starting. Here is a direct quote from CEO and President Mark Rohr from the latest transcript:

We anticipate the ongoing challenging economic environment in Europe and the current growth rates in Asia will continue through the remainder of 2012. As a result, we expect second half adjusted earnings per share will reflect typical seasonal trends and be slightly below the first half of 2012, excluding the dividend from the company's acetate China ventures.

Profitability

Margins have dropped for the company, but they seem to be at the bottom of a cycle as they are near historical lows. ROE is the lowest it was in eight years, but we see them at a cyclical bottom. The company had a 40 score in our EquityAnalytics research and ranked last among the 12 companies we cover in profitability. We believe the company still ranks very low on profitability, but the price seems to have priced in this weakness.

Value

The company definitely has value on their side right now, and we believe that is its most attractive value. Yet, we see the value as fair right now. The company is underperforming its industry in growth and profitability. Thus, it makes sense that Celanese's P/E and future P/E should lag to a point. The company seems to be bottoming in value, but until growth picks up, look for value to remain.

Growth

The company's growth showed its first decline in revenue and operating income since 2009. Revenue has dropped 1% year over year as well as a 24% drop in operating income. The company's growth will pick up again in 2013, but we expect it to underperform.

Financial Health

Financial health has been improving for the company as well. The current ratio improved as well as the quick ratio. The debt-to-equity ratio has declined. The company saw its long-term debt decrease from $3.02 billion to $2.98 billion, while FCF has increased from $434 million to $600 million. The increase in FCF is very solid for investing, increasing equity value.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.