CE like MMM that I previously suggested also screens cheap here.BRK (likely Todd or Ted) established a big position in the first quarter at higher prices. Very stable earnings since IPO in 2005 with solid growth. Recent acquisition that should close later this year does expose them to increased debt.
I haven’t bought any yet.
Very stable earnings since IPO in 2005 with solid growth. …
I don’t know much about them, but had a peek.
I guess the current case against them as a pick is not a secret: recession risks are not good for the sales or pricing power,
while feedstock price pressure (and no doubt labour) squeeze from the cost side.
These things might both be considered transient, but probably not small.
Not sure why you characterize them as having stable earnings?
The longer term trend is up, but the last five years net earnings look like 7.51 11.00 9.53 7.64 18.12.
I guess if you consider the bad 2019 and bad 2020 as both being exceptions.
Jim
Stable in the sense that they don’t lose money through at least the economic cycles since 2005 which have been pretty rough. However, who knows what we are facing now. We all know monetary policy for quite a while has been unprecedented. Effects of its unwinding are unknown but may be very very bad. I hope not because in my worse case scenario, there will be nowhere to hide at least in the short run. Hard productive assets should be durable if our system survives!
This looks like an interesting value play, thanks for bringing it up, web436. Impressive growth over the last 7 years, and trading at PE 6 at the moment.
Any idea what caused the stock to tank so hard starting June 10th? I don’t see any news.
It would take a good bit of study to get up to speed on their business and what impact the acquisition of Dupont’s Mobility and Materials division is going to have, looks like it could be worth the time at first glance.
I suppose inflation, recession fears, and adding a lot of debt while interest rates are up there have spooked people about their prospect of maintaining their growth record in the near future?
Jim wrote: The longer term trend is up, but the last five years net earnings look like 7.51 11.00 9.53 7.64 18.12.
That’s not what I’m seeing. Per share diluted earnings the last 7 years from most recent to earlier, per aaii.com: $ 17.06 $ 16.86 $ 6.88 $ 8.90 $ 6.84 $ 6.19 $ 2.01. Trailing twelve month earnings have climbed to $18.88 on the strength of first quarter earnings climbing from $2.83 to $4.61 year over year.
Well, many stocks are pricing in a recession already. In a deep bad recession along with bad inflation (labor costs, etc.) CE earnings would be suppressed but I think over any long term horizon (at least 5 years) CE likely does well from here. It is definitely one that is not easy to understand for me but I am a simple guy and like things like railroads, utilities, BRK reinsurance, See’s candy, etc. 
Oh and yes, earnings have gone from 2.37 in 2006 to 18.12 in 2021.
So if business is durable and earnings don’t return to 18 until 2027, then stock trades at P/E of say 11, you have a stock at 198 in 2027 and you collect a dividend starting at 2.41% today. So a gain of 78% over 5 years plus dividends.
CE is Celanese, perhaps the ultimate commodity chemical company.
For years they were a free standing US chemical company specializing especially in chemicals used to make cellulose acetate. They make big volume chemicals in highly automated capital intensive plants.
Celanese was acquired by Hoechst, the largest chemical company in Germany. Rhone Poulenc in France and Hoechst decided to merge their pharmaceutical operations to form Aventis. (Aventis later merged with Sanofi to form Sanofi-Aventis).
In the process both chemical companies spun off their chemical operations. Rhone Poulenc’s became Rhodia, later acquired by Solvay. (I’m retired from Rhodia.) Hoechst spun off Clariant for specialty chemicals and Celanese for commodity chemicals.
Commodity means that all competitors make identical interchangeable products. The supplier who can deliver the product cheapest usually gets the order. But games are played such as freight equalization–shipping is billed from the closest supplier. Or product swaps. You can buy from any supplier but the product ships from the closest plant.
You have no control of pricing. You can try to raise prices but it only sticks if competitors match your increase. Hence, you had better be a low cost producer. Competitors can easily set prices at or below your cost forcing you to sell at a loss or shut down.
Highly automated plants are difficult to slow down. They run best at capacity all the time. Market prices are often adjusted to move the product. They can be very profitable when there are shortages but can turn in losses in bad times.
These businesses are cyclical. Its important to buy low. Most organic chemicals are made from oil or natural gas. Raw material costs push up costs. But not always profits. Unless all competitors face the same increases.
The industry is famous for low cost supply contracts from the days when gas was orphaned and couldn’t get to market. Land owners signed contracts to accept modest royalties for their gas if the buyer would drill wells and install pipelines to ship it. Many have expired over the years but some may still be around–giving those companies competitive advantage.
Specialty chemical companies customize their product to the needs of the customer. They sell technology with the product and are rewarded with higher prices and better margins.
Another in that group to consider is Eastman Chemicals (EMN). They were founded as the chemical manufacturing division of Eastman Kodak in Kingsport, TN. Remember the days of acetate safety film. They are leaders in cellulose acetate.
They have a plant that makes raw materials for cellulose acetate from coal. A competitive advantage.
They also make polyester plastics like Kodel. They now are building plants to process recycled plastics. They recycle PET plastics into raw materials making it easier to deal with dirt, pigments, or other additives.
They also have technology to blend recycled plastics into the coal feed for their acetate raw materials. That converts them to something useful.
Commodity means that all competitors make identical interchangeable products. The supplier who can deliver the product cheapest usually gets the order. But games are played such as freight equalization–shipping is billed from the closest supplier. Or product swaps. You can buy from any supplier but the product ships from the closest plant.
You have no control of pricing. You can try to raise prices but it only sticks if competitors match your increase. Hence, you had better be a low cost producer. Competitors can easily set prices at or below your cost forcing you to sell at a loss or shut down.
Thanks for sharing. What make CE competitive in the industry? CE’s profit margin seems to be around 20%, is that higher than others? They also operate in China, could they face low-cost challengers locally?
Thanks Paul - good overview of Celanese.
I was just starting to dig into where Celanese is now after the acquisitions and spinoffs.
Financials show a LOT of adjustments to get to adjusted EBITDA. Looks like it’s going to take some digging.
There are special situations of CE’s earnings in the past two years one should be aware of:
2021, operating profit margin increases from previous years of 12-13% to 22.8%, reflecting market conditions that may or may not continue, resulting in net earning per share $16.86;
2020, operating profit margin 11.7%, without gain on sale of investment $1.4b, the net earning per share would be about $5, not the reported $16.75
2019, operating profit margin 13.2%, net earning per share $6.84
So, if the market condition goes back to 2019, earning per share could easily come under $10.
<<CE is Celanese, perhaps the ultimate commodity chemical company.>>
I don’t see Berkshire buying Celanese. In December 2016 when Dow Chemical
exercised their option to convert the $3 Billion of Preferred into 72.6
million shares of common WEB did not waste any time dumping it. By the
end of December 2016 it had been sold.
In an interview with Becky Quick on CNBC WEB said he has never invested
in chemical companies and he made some negative comments about the industry.
WEB said that Lubrizol is a specialty chemical company implying that it
was a whole different situation from Dow.
CE was a $1.1 billion purchase - not small and not large- so as the purse
strings get loosened a little bit for Todd and Ted I would not be surprised
if this is one of their ideas.
Some say chemical companies are the original conglomerates. They build large world scale plants to be competitive. Then do what they have to to sell all that product. That means selling into multiple markets and even making derivatives to move the volumes and make the profit.
Dow Chemical is one of those. They merged with Dupont. Did the streets and alleys routine and then redivided.
Chemical companies have a history of innovation creating new products like nylon. New products can be very profitable and the company does well. But over time competitors copy your best products or develop alternatives that compete for market share. Competition means that margins fall over time.
By streets and alleys chemical companies routinely plot their business on a grid. One axis is growth rate vs profitability by various measures (margin, return on capital, etc). Each quadrant has a name. High growth high margin businesses are the Stars. Most companies guard those carefully and often don’t name them in their annual reports. These are company jewels. They get max resources to grow.
High margin low growth are known as cash cows. They operate to generate cash to fund growth of the Stars. Low margin low growth are known as dogs. Most companies purge them. High growth, low margin are Problem Children. Usually they become either Stars or Dogs.
Some companies are reluctant to purge their traditional businesses that did well for the company in the past. Many jobs are involved. People you know. Big plants. Major community involvement.
Dow is well known for managing its business. Purging its dogs. Celanese less so. And especially noteworthy are the companies that buy other people’s dogs. Huntsman is one of those. It means heavy cost cutting to make dogs profitable and maybe lots of chaos. Some companies do that well. Almost as a specialty.
The natural trend is for chemical companies to trend toward becoming low margin commodity businesses. Good management learns to divest maturing business and invest in growth opportunities. Buying growth businesses is usually costly. Better to development them internally and let them blossom. But that does require investment is research and good management. The best companies develop that as part of their corporate culture. Many do it poorly. (Recall Xerox research inventing most of the modern PC techniques and selling them to Steve Jobs. Unwilling to risk bringing them to market.)
No sacred cows is the standard motto. Dogs must be purged or margins fall. Chemical companies that do well have their coat tails on fire. If they stop innovating margins go away.
WEB said that Lubrizol is a specialty chemical company implying that it
was a whole different situation from Dow.
When Lubrizol was an independent company, they had a venture capital operation that was looking for potential new ventures. Diversifying away from the lubricants business.
What happened to Lubrizols venture capital business under Berkshire Hathaway?