Navigating Challenges, The Company Leverages Healthcare Innovations And Tactical Partnerships For Growth

Key Takeaways

• Avient's strategy focuses on market share gain in varied sectors, especially healthcare, promising revenue growth with innovations like drug delivery devices.
  
• Emphasis on operational efficiency and strategic partnerships, notably in healthcare, positions Avient for margin expansion and diversified earnings sources.
  
• Avient faces potential margin compression and revenue pressure due to rising raw material costs, economic uncertainty, sectoral downturns, and geopolitical risks.

Catalysts

Operates as a formulator of material solutions in the United States, Canada, Mexico, Europe, South America, and Asia.

• Avient's organic growth strategy, emphasizing market share acquisition and new product specifications across diverse end markets like packaging, healthcare, and construction, enhances revenue prospects, particularly as it expands into high-demand areas like drug delivery and monitoring devices in healthcare.
  
• The company's focus on cost control and operational efficiency, alongside benefiting from raw material deflation, supports margin expansion, promising improved net margins moving forward.
  
• Avient's strategic partnerships in the healthcare sector, especially with key pharmaceutical companies and ODMs for developing medical devices, are likely to drive revenue growth in this high-margin end market.
  
• Expansion into innovative composite materials for applications like electrical grid hardening and construction presents opportunities for Avient to penetrate new markets and segments, potentially boosting revenue and diversifying earnings sources.
  
• A disciplined approach to managing expenses and capitalizing on raw material deflation trends contributed to Avient's EBITDA margin improvements, suggesting a sustainable path towards higher earnings through careful cost management and operational efficiencies.

Assumptions

• Analysts are assuming Avient's revenue will grow by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 3.7% today to 0.1% in 3 years time.
• Analysts expect earnings to reach $274.8 million (and earnings per share of $2.95) by about September 2027, up from $115.9 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 21.6x on those 2027 earnings, down from 38.7x today. This future PE is lower than the current PE for the US Chemicals industry at 25.6x.
• Analysts expect the number of shares outstanding to grow by 0.25% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.29%, as per the Simply Wall St company report.

Risks

• The increasing inflation across the majority of Avient's raw material basket, including hydrocarbon-based materials and certain polymer additives, could lead to rising input costs, potentially compressing margins and affecting net income negatively.
  
• Persistent economic uncertainty in key markets, notably China, might dampen demand for Avient's products, leading to slower revenue growth or pressure on revenues.
  
• The telecommunication and energy sectors, significant to Avient's business, show weakness with double-digit sales declines, indicating potential long-term challenges in these markets that could affect the company's revenue diversification strategy and impact overall revenues.
  
• The reliance on variable compensation as a cost factor may introduce financial instability; a $30 million year-over-year increase in variable compensation anticipated in the second half of the year could affect net margins if revenue growth does not offset these additional expenses.
  
• Dependency on geopolitical and economic stability in regions like Latin America, where external factors such as flooding and drought have temporarily boosted demand, implies risk; any stabilization or negative change in these external conditions could lead to volatility in sales growth and impact revenues.

Valuation

• The analysts have a consensus price target of $52.2 for Avient based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.6 billion, earnings will come to $274.8 million, and it would be trading on a PE ratio of 21.6x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $49.13, the analyst's price target of $52.2 is 5.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.