Cost Cuts, Divestitures And Nylon 66 Moves Will Secure Success

Key Takeaways

• Anticipated divestitures and inventory strategies aim to strengthen cash flow and balance sheets, enhancing earnings potential.
  
• Focus on growth programs in China, notably in electric vehicles, is expected to bolster future revenue and earnings.
  
• Demand uncertainties, industry challenges, strategic difficulties, and high leverage pose risks to Celanese's revenue growth and earnings stability.

Catalysts

A chemical and specialty materials company, manufactures and sells engineered polymers worldwide.

• Celanese is expecting significant cost reduction initiatives to bear fruit in the second half of 2025, with an anticipated $100 million improvement, positively impacting net margins and earnings.
  
• The company is exploring a variety of divestiture options beyond just the Micromax business, which could result in improved cash flow and stronger balance sheet, thereby enhancing earnings.
  
• Stabilization of the Nylon 66 market through capacity rationalization and targeted price increases may lead to a recovery in net margins and earnings in the longer term.
  
• Celanese is planning to strategically reduce inventory and adjust production rates based on demand, which is expected to improve cash flow and free cash flow generation.
  
• Increased focus on high-impact growth programs and enhanced customer solutions in China, particularly in the electric vehicle segment, is anticipated to drive revenue growth and earnings in the future.

Celanese Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Celanese's revenue will grow by 1.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from -16.4% today to 7.9% in 3 years time.
• Analysts expect earnings to reach $832.0 million (and earnings per share of $7.35) by about July 2028, up from $-1.7 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $726 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.7x on those 2028 earnings, up from -3.9x today. This future PE is lower than the current PE for the US Chemicals industry at 23.3x.
• Analysts expect the number of shares outstanding to grow by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.9%, as per the Simply Wall St company report.

Celanese Future Earnings Per Share Growth

Risks

• The demand uncertainty is a key concern, as reduced customer demand could offset any operational efficiency improvements and impact revenue adversely.
  
• Challenges in the nylon 66 business, due to industry overcapacity and reduced demand, have been the biggest driver of earnings decline. If these issues persist, they can significantly impact net margins.
  
• The potential need for further divestitures beyond Micromax indicates possible long-term strategic difficulties in cash generation and restructuring, potentially affecting overall earnings stability.
  
• Global economic conditions, including lower oil prices, may suggest reduced demand across various end markets, which could hinder expected revenue growth despite Celanese's agnostic operating model regarding feedstock costs.
  
• High leverage remains a concern, with the company focusing heavily on cash generation and inventory reduction to manage debt levels. Any adverse shifts in market conditions or earnings could constrain financial flexibility and impact net margins.

Valuation

• The analysts have a consensus price target of $65.713 for Celanese based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $110.0, and the most bearish reporting a price target of just $47.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $10.6 billion, earnings will come to $832.0 million, and it would be trading on a PE ratio of 11.7x, assuming you use a discount rate of 10.9%.
• Given the current share price of $58.74, the analyst price target of $65.71 is 10.6% higher.
• 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.