Rising Caustic Soda And Defense Contracts Fuel A Bright Earnings Horizon

Key Takeaways

• Olin’s operations and revenue may benefit from higher caustic soda prices and potential antidumping duties on Chinese epoxy imports.
  
• Expanding defense projects and share buyback strategies are poised to boost Olin’s revenue mix and enhance shareholder value.
  
• Olin faces challenges from natural disaster impacts, weak ammunition demand, subsidized epoxy imports, macroeconomic uncertainties, and execution risks on new projects.

Catalysts

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

• Olin's operational disruptions due to Hurricane Beryl and subsequent recovery efforts could lead to improved EBITDA as assets return to normal operations, impacting future earnings positively once the temporary infrastructure is replaced and efficiencies are restored.
  
• Increasing caustic soda prices due to global supply constraints and robust demand, particularly in export markets, could drive future revenue growth as Olin capitalizes on higher pricing.
  
• Anticipated antidumping duties on Chinese epoxy imports by the U.S. ITC and the European Union could improve competitive positioning and margins for Olin's Epoxy business if implemented, enhancing future earnings.
  
• Expansion in defense-related operations, including the construction of the Army's Lake City Next-Generation Squad Weapon Ammunition Facility, is expected to increase Winchester's revenue base, positively impacting Olin's revenue mix and earnings.
  
• Continued share repurchase initiatives and capital return strategy, supported by strong cash flow and investment-grade balance sheet, can enhance shareholder value and contribute to earnings per share (EPS) growth.

Olin Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Olin's revenue will grow by 5.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.3% today to 10.0% in 3 years time.
• Analysts expect earnings to reach $762.1 million (and earnings per share of $7.59) by about October 2027, up from $150.8 million today.
• 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 2027 earnings, down from 31.6x today. This future PE is lower than the current PE for the US Chemicals industry at 25.5x.
• Analysts expect the number of shares outstanding to decline by 4.87% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.67%, as per the Simply Wall St company report.

Olin Future Earnings Per Share Growth

Risks

• Olin's operations were significantly impacted by Hurricane Beryl, with a total estimated expense of $135 million affecting 2024 adjusted EBITDA, demonstrating vulnerability to natural disasters that may impact revenue and earnings.
  
• Winchester's commercial ammunition volumes underperformed expectations due to soft consumer demand and retailers destocking inventory, potentially impacting future revenues and net margins if demand remains weak.
  
• The presence of subsidized epoxy imports from Asia, particularly China, has challenged Olin’s pricing power and competitive position in the global epoxy market, which could affect future revenues and margins if antidumping duties are not implemented effectively.
  
• The macroeconomic environment is marked by uncertainties, with expectations of a continued trough into 2025, limiting overall demand recovery in core markets like Chlor Alkali and Epoxy, potentially impacting revenue growth and earnings.
  
• Projects such as the Lake City Next-Generation Squad Weapon Ammunition Facility, while presenting growth opportunities, also involve execution risks and require significant investment, which may strain financial resources and impact net margins if not managed efficiently.

Valuation

• The analysts have a consensus price target of $48.53 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 $70.0, and the most bearish reporting a price target of just $41.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $7.6 billion, earnings will come to $762.1 million, and it would be trading on a PE ratio of 7.9x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of $40.89, the analyst's price target of $48.53 is 15.7% 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.