Celanese Corporation CE is expected to benefit from its productivity measures, investments in organic projects and strategic acquisitions in a challenging demand environment.
Shares of this leading chemical and specialty materials maker are down 15% over a year compared with the 36.4% rise of its industry.
Let’s find out why this Zacks Rank #3 (Hold) stock is worth retaining at the moment.
What’s Aiding Celanese?
Celanese is gaining from inorganic growth initiatives, productivity actions and investments in high-return organic projects. The company is committed to execute its productivity programs that include implementation of a number of cost reduction capital projects.
The company’s margins are expected to be supported by productivity initiatives, price hike actions and operational improvement. The company expects to achieve gross savings of $200 million from its productivity actions in 2020. It also expects to generate one-time cost savings of $30-$40 million through reductions in travel, manufacturing costs and other corporate function expense.
Celanese also expects to generate $300-$400 million of incremental cash on account of the actions that it is currently taking on productivity, working capital management and capital expenditure prioritization.
Celanese also continues to actively pursue acquisitions, which are providing it opportunities for additional growth, investment and synergies. The acquisitions of SO.F.TER., Nilit and Omni Plastics are expected to significantly contribute to earnings expansion in the Engineered Materials segment. The acquisition of Elotex will also boost the company’s position in the vinyl acetate ethylene emulsions space.
Moreover, Celanese is committed toward rewarding its shareholders with dividends and share buybacks, leveraging solid free cash flow generation. During 2019, the company returned a record $1.3 billion to shareholders through dividends and share repurchases. Moreover, the company returned $224 million to shareholders (including $74 million in dividends) in the first quarter of 2020. It generated operating cash flow and free cash flow of $259 million and $135 million, respectively, in the quarter.
Weak Demand a Worry
Celanese is exposed to a sluggish demand environment. The company witnessed demand weakness due to the impacts of the coronavirus outbreak during the first quarter. Weak demand across certain end markets (especially automotive and electronics) hurt its sales in the quarter.
Soft demand conditions are likely to continue in the second quarter. The company expects reduced consumer activities, especially in the Western Hemisphere, to meaningfully impact its demand in the second quarter. It sees a 25-35% sequential decline in demand in the Engineered Materials unit in the second quarter. Moreover, demand in the Acetyl Chain unit is projected to decline 15-25% sequentially in the quarter. Lower demand is expected to hurt earnings in these units in the second quarter.
Celanese Corporation Price and Consensus
Stocks to Consider
Better-ranked stocks worth considering in the basic materials space include Royal Gold, Inc. RGLD, Sandstorm Gold Ltd SAND and Harmony Gold Mining Company Limited HMY.
Royal Gold has a projected earnings growth rate of 62.1% for the current year. The company’s shares have gained around 10% in a year. It currently has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Sandstorm Gold has a projected earnings growth rate of 55.6% for the current year. The company’s shares have rallied roughly 72% in a year. It currently carries a Zacks Rank #2 (Buy).
Harmony Gold has an expected earnings growth rate of 264.3% for the current fiscal year. The company’s shares have shot up around 140% in the past year. It presently carries a Zacks Rank #2.
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