- While COVID-19 has created fear, uncertainty and doubt with investors, it has also presented "once-in-a-lifetime" buying opportunities unlikely to last long.
- Investors often lump all stocks together as "the market" claiming the market is too high and will "retest the lows." Perhaps true for Large Cap and Growth,but not value.
- Polycarbonate will prove to be a huge new opportunity for Trinseo as retailers and restaurants will have to retrofit to accommodate for social distancing. PVH and others have already confirmed this.
- Trinseo just reported their quarterly earnings and hosted a call for investors. The tone was clearly positive and the numbers compelling.
- This story is both misunderstood and generally neglected by the sell-side, as indicated that there is not a single "Buy" rating and "group-think" is prevalent. This appears as though it is about to change.
This is an exceptional story and all signs are present that we are at the beginning of a multi-year run for Trinseo.
Following a multi-year downturn, Trinseo was poised for a new cycle, enhanced profits and improved execution. With a new 20%+ activist shareholder, a restructured management/executive team, and streamlined business units, Trinseo was seeing the improvement in their business, and the upcoming cycle that industry executives with decades of experience have seen play out repeatedly in the past. And then the COVID-19 hit and pulled indexes down a quick 30% from recent all-time highs earlier this year. But TSE, was already down from mid-$80s to $30 (about 65%), before losing 50%+ down to the mid-teens. Hence, when pontiffs and financial prognosticators were ranting about the massive 30% pullback, and many then saying that the market needs to go lower, and that 30% is not enough to reflect the downturn of the economy, I might agree. But for some sectors, many chemical companies and TSE in particular, when it is already down more than 80% from the 2018 high, it seems pretty clear that a lot of bad news is baked in. In the case of TSE, it is absurd, and simply misunderstood. I have written several detailed articles on TSE (Trinseo Trading with Maximum Fear and Narrowing the Focus - TSE) and commented extensively on news items for TSE, but with the earnings call completed, I would urge serious investors to either listen to the call replay or at least read the transcript. The update is compelling and should remove any anxiety investors might have about buying a big position in TSE.
These are the primary takeaways from the TSE call from May 7, 2020, and could appropriately be called:
"7 Reasons to buy TSE now."
- Beat the Quarter and Expectations DESPITE COVID. Trinseo beat Q1 nicely despite significant headwinds in March from COVID. This was despite the company being adversely affected by a supplier issue in the Polycarbonate business.
- Already seeing Business Acceleration in China and Europe. The conference call was extraordinarily bullish as the company admitted that while they guided Q2 consistent with their April business levels (which were the trough as the world was shut down from COVID) they said May order levels improved significantly across the board. They are already seeing a significant acceleration in Chinese business both for automotive as well as appliances. They are also seeing improvements in Europe. Remember this company has 85% of its business outside of the US, so as China and Europe are further along with the recovery from COVID, their business should recover faster than others. TSE is already seeing this.
- Balance Sheet is Solid and TSE Has Ample Liquidity - No Debt Concerns. The company also showed that they have plenty of liquidity and in an extreme stress case they generate cash above $160 million of EBITDA (consensus is $252 and now, indicated this is going higher so there is no risk here). Investors have asked if TSE will be able to generate FCF in extremely adverse circumstances, and the answer is clearly - YES.
- DIVIDEND is Safe and now Yields 9%. The company also mentioned on the call that despite the global uncertainty they are committed to and expect to keep the dividend, which now yields 9%.
- No Sponsorship and Not a Single "BUY" Rating from the Sell-Side Despite a Compelling and Very Inexpensive Quality Company. It is clear from the call, that the sell-side does not understand this company (zero buy ratings, although this may change based on the tone in the Q&A section of the call). Investors are concerned about styrene business when they should not be. The styrene market has already troughed, there were two big facilities coming to market and they already have. Styrene margins have improved significantly since they troughed in early 2020 and are now at levels closer to the first half of 2019. This is in part because high-cost players have shut down. If this pricing holds, there will be a lot of upside to numbers from here.
- Concerns about Styrene Profits Unwarranted. People are also worried about low styrene profits in Q1, but in addition to the point above about the market having recovered significantly since then, Q1 had an abnormally high hit from a big maintenance turnaround (once every 30 years), so this is also going away going forward.
- Bottom Line - What are We missing??? With a 9% dividend yield at trough and ZERO "Buy" ratings from the sell-side on the stock, and the business now reaccelerating, despite COVID-19, why would you not buy the stock?
And for those wondering if they should "chase" TSE after the bounce from $14 to $19, I would argue (1) TSE never should have traded in the teens (and shouldn't). (2) The stock was sold off much harder and more indiscriminately vs. other stocks (especially large-cap), and TSE, therefore, has much more upside potential. If anyone has any doubt, I will say candidly that this ranks among my highest conviction ideas ever.
This article was written by
Analyst’s Disclosure: I am/we are long TSE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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