Cost Reductions And US PVC Market Entry Will Improve Future Prospects

Key Takeaways

• Strategic cost reductions and disciplined capital allocation are expected to enhance margins and drive future earnings growth.
  
• Expanding into U.S. PVC and expanding Winchester operations should boost revenue and strengthen market position.
  
• Persistent commercial headwinds, unfair epoxy imports, and rising costs threaten Olin's revenue and margins, especially in Epoxy, Winchester, and Chlor Alkali segments.

Catalysts

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

• Olin plans to achieve over $250 million in cost reductions by 2028, with $20 million to $30 million expected savings in 2025. This streamlining of operations is anticipated to improve net margins and earnings.
  
• Olin's entry into the U.S. PVC market via a tolling partnership should unlock additional caustic soda volume and increase revenue with expected sales starting in the first quarter of 2025.
  
• The Winchester business is anticipated to benefit from a new ECO FLYER line and increased domestic/international military demand, which should drive revenue growth and enhance net margins.
  
• The acquisition of AMMO, Inc.'s small-caliber ammunition manufacturing assets is expected to be immediately accretive to EBITDA, with a synergy benefit of $40 million within three years, thereby improving net margins and earnings.
  
• Olin's strong financial position, including an investment-grade balance sheet and disciplined capital allocation, such as continued share repurchases and incremental investments, is likely to drive future earnings growth.

Olin Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Olin's revenue will grow by 3.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.7% today to 4.9% in 3 years time.
• Analysts expect earnings to reach $356.0 million (and earnings per share of $3.04) by about April 2028, up from $108.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.9x on those 2028 earnings, down from 25.3x today. This future PE is lower than the current PE for the US Chemicals industry at 19.9x.
• Analysts expect the number of shares outstanding to decline by 3.35% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.1%, as per the Simply Wall St company report.

Olin Future Earnings Per Share Growth

Risks

• Seasonal lower demand in the Epoxy segment and persistent commercial headwinds in the Winchester segment may impact revenue negatively, reflecting broader market challenges.
  
• Challenges from unfairly subsidized epoxy resin imports into the U.S. and Europe could threaten future earnings if favorable antidumping decisions are not reached.
  
• The prolonged industry trough in the Chlor Alkali Products and Vinyls segment, coupled with seasonally lower demand, could strain net margins if not managed with disciplined operating rates.
  
• Ongoing commercial ammunition demand weakness and continued retailer destocking present potential risks to Winchester's revenue and operating performance in the near term.
  
• Rising input costs for caustic soda, epoxy feedstock, and higher raw material costs might compress EBITDA margins if these cannot be offset by pricing improvements or cost savings.

Valuation

• The analysts have a consensus price target of $31.353 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 $40.0, and the most bearish reporting a price target of just $25.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.2 billion, earnings will come to $356.0 million, and it would be trading on a PE ratio of 11.9x, assuming you use a discount rate of 9.1%.
• Given the current share price of $23.79, the analyst price target of $31.35 is 24.1% 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.