Hebron Facility Expansion Will Increase Polycarbonate Capacity For Key Industries

Key Takeaways

• Covestro's strategic focus on expanding production capacity and sustainability aims to boost revenue by increasing market share and creating a competitive advantage.
  
• The STRONG program's cost efficiencies and renewable energy increase are expected to enhance earnings and margins through reduced costs and sustainability improvements.
  
• Weak demand, negative pricing trends, and restructuring costs threaten Covestro's profitability and financial flexibility despite higher sales volumes and positive cash flow.

Catalysts

Supplies high-tech polymer materials and application solutions.

• Covestro's investment in expanding its Hebron, Ohio facility is a forward-looking catalyst that aims to boost capacity for specialized polycarbonate materials, particularly benefiting the automotive, electronics, and healthcare industries in North America. This should positively impact future revenue and earnings by expanding market share in high-demand sectors.
  
• The company’s strategic focus on full circularity and climate neutrality, including partnerships for recycling waste plastics and developing bio-based aniline, suggests an increase in demand for sustainable materials. This initiative could enhance Covestro's long-term revenue and potentially improve net margins as sustainability becomes a competitive advantage.
  
• The transformation program STRONG aims to achieve €400 million in annual savings by 2028. This focus on cost efficiencies and AI-supported processes is likely to improve net margins and earnings by reducing fixed costs and restructuring inefficiencies.
  
• Covestro's expected modest sales volume increase in 2025 and margin recovery indicate a potential uplift in revenue and earnings as market conditions stabilize, particularly as volume increases are anticipated across key global regions like APAC and EMLA.
  
• The increase in renewable electricity share from 16% in 2024 to about 22% in 2025 is expected to reduce carbon emissions and possibly decrease energy costs over time, improving net margins by enhancing operational efficiency and sustainability credentials.

Covestro Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Covestro's revenue will grow by 2.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from -2.8% today to 3.1% in 3 years time.
• Analysts expect earnings to reach €478.9 million (and earnings per share of €2.54) by about July 2028, up from €-391.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €532 million in earnings, and the most bearish expecting €246.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.7x on those 2028 earnings, up from -29.2x today. This future PE is greater than the current PE for the GB Chemicals industry at 18.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.74%, as per the Simply Wall St company report.

Covestro Future Earnings Per Share Growth

Risks

• The economic climate remains challenging, with sales down due to lower prices despite higher volumes, indicating persistent weak demand which could adversely impact future revenues and profitability.
  
• There is an unfavorable industry supply-demand ratio resulting in a negative pricing delta, contributing to stagnant EBITDA, which could pressurize net margins.
  
• The net income for 2024 is negative, reflecting a challenging financial position that could hinder earnings growth if the trend continues.
  
• The free operating cash flow, while positive, was relatively low at €89 million, suggesting limited financial flexibility to fund growth initiatives without impacting net margins.
  
• Significant restructuring costs related to the transformation program, STRONG, may weigh on near-term earnings, jeopardizing margin improvements and overall financial health.

Valuation

• The analysts have a consensus price target of €61.875 for Covestro based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €15.2 billion, earnings will come to €478.9 million, and it would be trading on a PE ratio of 28.7x, assuming you use a discount rate of 5.7%.
• Given the current share price of €60.5, the analyst price target of €61.88 is 2.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.