Refinancing And PVC Entry Will Secure A Bright Future

Key Takeaways

• Productivity improvements and refinancing actions boost Olin's financial stability and enhance future margins and earnings.
  
• Strategic expansions in Chlor Alkali and ammunition businesses promise revenue growth and increased EBITDA margins.
  
• Global economic uncertainty, tariff-related inflation, weak ammunition markets, and epoxy overcapacity threaten Olin's profitability and revenue despite cost-control efforts.

Catalysts

Manufactures and distributes chemical products in the United States, Europe, Asia Pacific, Latin America, and Canada.

• Olin is implementing productivity and structural cost improvements, raising their target cost savings to $50 million to $70 million for 2025, which could enhance their net margins.
  
• Successful refinancing actions have resulted in no material required debt repayments until 2029, improving Olin's financial stability and potentially impacting future earnings positively by reducing interest expenses.
  
• Olin's Chlor Alkali Products and Vinyls business is experiencing positive pricing trends and seasonal demand recovery for key products like caustic soda, which could boost revenues.
  
• Winchester's growth strategy, including the acquisition of AMMO Inc.'s ammunition assets and operational synergies from this acquisition, will likely enhance EBITDA margins.
  
• The company's strategic entry and potential further expansion in the PVC market are expected to create new revenue streams and strengthen the Chlor Alkali business.

Olin Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Olin's revenue will grow by 4.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.9% today to 6.1% in 3 years time.
• Analysts expect earnings to reach $448.3 million (and earnings per share of $2.99) by about May 2028, up from $61.4 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $351.2 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.9x on those 2028 earnings, down from 38.4x today. This future PE is lower than the current PE for the US Chemicals industry at 20.2x.
• Analysts expect the number of shares outstanding to decline by 3.59% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.53%, as per the Simply Wall St company report.

Olin Future Earnings Per Share Growth

Risks

• Economic uncertainty continues to dominate the global macro environment, potentially impacting Olin's future revenue and earnings as consumer and industrial demand remains unpredictable.
  
• Tariff-related price inflation on domestic prices of metals due to rising costs for steel, aluminum, and copper could lead to increased operating costs for Winchester, negatively impacting net margins and profitability.
  
• Weak commercial ammunition market led by cautious consumers and ammunition retailers' destocking could drag on Winchester’s revenues, affecting overall earnings since commercial sales are a significant portion of the business.
  
• Overcapacity in the Epoxy market, especially in Asia, combined with challenges from anti-dumping duties, presents a significant headwind, which is expected to yield negative earnings in the Epoxy segment, impacting Olin's overall profitability.
  
• Continued higher raw material and operating costs could offset any price improvements in the Chlor Alkali Products and Vinyls and Epoxy businesses, leading to weaker net margins and affecting the bottom line despite efforts to control costs and improve productivity.

Valuation

• The analysts have a consensus price target of $26.118 for Olin 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 $34.0, and the most bearish reporting a price target of just $20.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.4 billion, earnings will come to $448.3 million, and it would be trading on a PE ratio of 7.9x, assuming you use a discount rate of 9.5%.
  
• Given the current share price of $20.47, the analyst price target of $26.12 is 21.6% 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.