Calculated Cost Cuts And Clear Lake Startup Spark Profit Optimism Amid Macro Challenges

Key Takeaways

• Reduction in production and SG&A costs aims to enhance net margins and cash flow, boosting financial stability.
  
• Commitment to deleveraging and project pipeline advancement seeks revenue growth and reduced financial risk.
  
• Celanese's anticipated macroeconomic challenges and cost-reduction efforts suggest potential struggles with revenue growth and maintaining net margins amid demand slowdowns.

Catalysts

A chemical and specialty materials company, manufactures and sells high performance engineered polymers in the United States and internationally.

• Celanese plans to significantly slow production to better match demand and drive sustainable improvements in cost structure, positively impacting net margins and cash flow.
  
• The company is implementing additional cost reductions, particularly in SG&A, to strengthen earnings and cash generation, potentially improving net margins.
  
• Celanese is focused on advancing its project pipeline and winning more business opportunities, which could increase future revenue.
  
• The expected $100 million annual benefit from the Clear Lake asset startup, with the majority anticipated to occur next year, could positively impact earnings.
  
• The company is committed to deleveraging to 3x net debt-to-EBITDA by reducing its dividend temporarily and considering opportunistic divestitures, which could boost free cash flow and reduce financial risk.

Celanese Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Celanese's revenue will grow by 2.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.5% today to 12.4% in 3 years time.
• Analysts expect earnings to reach $1.4 billion (and earnings per share of $12.61) by about November 2027, up from $1.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.5 billion in earnings, and the most bearish expecting $1.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.2x on those 2027 earnings, up from 7.4x today. This future PE is lower than the current PE for the US Chemicals industry at 23.9x.
• Analysts expect the number of shares outstanding to grow by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.67%, as per the Simply Wall St company report.

Celanese Future Earnings Per Share Growth

Risks

• Celanese has announced a temporary reduction in its quarterly dividend starting in the first quarter of 2025 to support deleveraging efforts, which may signal anticipated challenges in maintaining cash flows, thereby impacting earnings.
  
• The company faces broad and persistent macroeconomic headwinds, particularly in key sectors like automotive and industrial, with European auto builds decreasing, which could hamper revenue growth.
  
• There's a notable slowdown in production to match demand, potentially leading to lower revenues and operational efficiency challenges, impacting net margins.
  
• Persistent demand challenges in end markets like automotive and industrial, coupled with inventory destocking, could lead to decreased sales volumes and adversely affect net profits.
  
• The need for aggressive cost reductions, especially in SG&A, implies pressure on maintaining net margins and may indicate further underlying financial stress.

Valuation

• The analysts have a consensus price target of $108.06 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 $170.0, and the most bearish reporting a price target of just $76.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $11.1 billion, earnings will come to $1.4 billion, and it would be trading on a PE ratio of 11.2x, assuming you use a discount rate of 9.7%.
  
• Given the current share price of $74.0, the analyst's price target of $108.06 is 31.5% 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.