Healthcare And Defense Materials Will Steadily Support A Fairly Valued Long Term Outlook

Catalysts

About Avient

Avient supplies specialized materials and color, additives and inks solutions to customers across consumer, packaging, health care, defense and industrial end markets.

What are the underlying business or industry changes driving this perspective?

• Although health care materials are growing at a high single digit pace and supported by increased use in medical devices and supplies, this is still less than 20% of the portfolio. This limits how much it can influence consolidated revenue and earnings in the near term.
• While defense demand in the U.S. and Europe is strong and backed by higher law enforcement and military spending, order timing can be lumpy and dependent on inspections and clearances. This could introduce volatility into quarterly revenue and earnings.
• Despite early opportunities tied to high performance computing and semiconductor manufacturing in Asia, packaging and consumer markets in key regions like EMEA and North America remain subdued. This can cap top line growth and slow any improvement in net margins.
• Although growth vectors such as health care, defense and materials tied to artificial intelligence and data center buildout are gaining traction, they currently offset weakness in roughly 80% of the portfolio rather than driving broad-based expansion. This may keep overall revenue and EBITDA growth modest.
• While productivity initiatives and plant footprint optimization are targeting about US$40 million of benefits in 2025 and have already supported EBITDA margin expansion, ongoing wage inflation and potential additional restructuring needs could absorb part of these gains and limit EPS growth.

Assumptions

This narrative explores a more pessimistic perspective on Avient compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Avient's revenue will grow by 2.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.5% today to 8.2% in 3 years time.
• The bearish analysts expect earnings to reach $282.4 million (and earnings per share of $3.0) by about January 2029, up from $113.3 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $429.3 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 14.2x on those 2029 earnings, down from 27.7x today. This future PE is lower than the current PE for the US Chemicals industry at 25.6x.
• The bearish analysts expect the number of shares outstanding to grow by 0.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.66%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Health care, defense, telecommunications and high performance computing materials are all tied to long-term secular demand, and Avient is already seeing high single digit growth in these areas. If these niches keep scaling within the portfolio, they could lift consolidated revenue and earnings above a flat share price scenario.
• Management is targeting about US$40 million of productivity benefits in 2025 and has already expanded adjusted EBITDA margins in both Color, Additives and Inks and Specialty Engineered Materials. If these efficiencies persist or deepen, net margins and EPS could trend higher than a flat share price would suggest.
• Avient is reporting consistent cash generation, with expected free cash flow of US$190 million to US$210 million and planned debt reduction of US$150 million this year. A stronger balance sheet and lower interest expense could improve earnings and support a higher valuation multiple than a stagnant share price implies.
• Growth vectors in areas like health care, defense, Dyneema personal protection and materials for artificial intelligence and data centers are described as growing much faster than the rest of the portfolio. If these secular trends continue and the mix shifts toward these businesses, revenue growth and EBITDA could accelerate relative to expectations of a flat share price.
• Customer demand in consumer and packaging is currently weak, but management has already seen sequential improvement in consumer and expects packaging support from semiconductor related applications and Latin America seasonality. A sustained recovery in these larger end markets could produce higher top line growth and EPS than a flat outlook assumes.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Avient is $34.0, which represents up to two standard deviations below the consensus price target of $41.25. This valuation is based on what can be assumed as the expectations of Avient's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $50.0, and the most bearish reporting a price target of just $34.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $3.4 billion, earnings will come to $282.4 million, and it would be trading on a PE ratio of 14.2x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of $34.29, the analyst price target of $34.0 is 0.9% lower. 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.