Chemours: Upside after irregularities, good outlook for 2024-2026 (CC)

Dear readers and followers,

As you know, I have been a vocal supporter of investing in Chemours.New York Stock Exchange:CC) for a while now, and even after my last post that was published a few months ago. And you Find it here.

Sometimes luck happens and you can “catch” a company at just the right time. That was the case with Chemours, which I covered in my last column. That’s why, despite the recent downturn, my stock, especially the stock I bought back then, is up over 22% while the market is up just 5%. And this was in February of this year.

We already told you about this scandal and its consequences at the time. The CEO, CFO and key figures at Chemours Concurrent with the internal investigation, the company uncovered potential weaknesses in its internal controls, resulting in delayed year-end reporting. The company subsequently recovered quickly as noted above, but has since experienced a more gradual decline.

However, if you believe that allegations such as those made here are without merit, you will find that any investment has the potential for significant reversal.

Less than a week later, after the management leave mentioned here, news came that the company had appointed a new CFO.

There’s also some other news coming in. So in this article, we’ll give you an update on Chemours and provide new targets and estimates for the company, if necessary.

Let’s see what we have here.

Chemours – Room for growth remains despite production halt

So, one thing that happened not too long ago (a week ago, in fact) is that the company temporarily stopped production of TiO2 in Mexico, although this has more to do with government intervention due to water shortages than anything else. Mexico, like many other regions, is currently experiencing a severe drought, and TiO2 production requires a lot of water. So, it’s not surprising.

The stock price crash following the news of the audit was proven to be an overreaction by the stock price’s subsequent surge, which also vindicated my decision to invest some money in Chemours at the time.

The latest financial results are for Q1 24. During this period, the company’s performance did not improve, recording further declines in net sales, EPS, Adjusted EBITDA (37%), margins, and operating cash flow. At the same time, we also recorded an increase in capital investment.

Looking at the numbers, it’s clear that it wasn’t a good quarter.

Here are some of the overall drivers of this: The trends are actually not that worrying in this regard. Sure, there are some price changes, but the volumes are large, there are currency and other factors. Price declines within the TT segment and price declines for traditional refrigerants create a “worst case scenario” so to speak.

But as I said before, this is a basic materials company. These companies, by their nature, are volatile. If you’re an investor, you shouldn’t be surprised by that. Volatility.

The volume change that we’re seeing here is due to continued weakness in demand — people are just not stockpiling and there are some macro-sensitive end markets in the APM segment, as well as weaker demand in foams, propellants and other sub-segments where Chemours is a significant player.

Basics?

There’s nothing particularly worrying about. Chemours is still relatively cash-rich, with $3.3 billion in net debt and 3.7x leverage on a TTM net leverage basis. Not the best, but not the worst either. With total available cash of over $1.4 billion, the company is not at risk in the near term.

I think what’s interesting here is the segment performance. The latest quarter was the latest decline since the year-over-year decline in Q1 2022, and the quarter saw Titanium Technologies net sales reach almost bullion equivalent. Now that number has been cut almost in half, but the margins to EBITDA are by far the worst here.

The TSS division, which includes refrigerants, is actually stable. Net sales declined slightly and EBITDA declined, but the division’s EBITDA margin is still good at over 33%. The company also expects sequential growth for the division to be in the mid-teens as demand for Opteon refrigerants is expected to recover in the near future, resulting in adjusted EBITDA growth. The important thing to remember is that Chemours is not only making new refrigerants, but is also focusing on its traditional business, which is currently being phased out.

This is also one of the main reasons we invest in Chemours, a leader in refrigerants, thermal management solutions, specialty solvents and more.

If you’re interested in investing in Chemours, you should look at this refrigeration segment because I believe this is where the company really shines and where the future potential is going to be. One example of an application is data centers. These are still using traditional cooling technologies and are very energy intensive operations. Mid-Sized Data Center in the United States 300,000 tons of water is consumed for cooling every day. One of the main reasons is You can find out why people are moving to liquid cooling here.

There are many benefits to using this type of technology for cooling, with less water usage, lower GWP, smaller asset footprint, lower energy usage and less maintenance. And this is just one sub-segment of data centers.

APM, or performance materials, remains the “outlier” for the company in this area. EBITDA has plummeted, even though sales have not been “that bad”. Part of the reason is ongoing maintenance that is now being resolved (not forecasted). Apart from that, end market prices are falling, which means lower cost absorption, but mainly the company needs a market recovery in this area to improve.

So, as I said, it wasn’t a great quarter, but for a basic materials company like Chemours, you should look at the long-term benefits for investors, the valuation-related upside that the company definitely has in my opinion.

Let’s see what the evaluation tells us and where the challenges lie.

Chemours – There’s a lot to like, but patience is a must

Despite the recovery we’ve seen here, the company’s stock is still arguably at rock-bottom valuation levels, and I think this is a great example of how volatility can affect stock prices and valuations (in both senses), and how benefits can or should be gained from this situation.

I have no doubt that Chemours will continue to decline this year. The combination of a weak market, poor pricing, internal issues, and maintenance has me wondering how things will go this year — how bad will they get?

But what goes beyond that?

The upside is huge. If these numbers are realistic, they’re in triple digits. Yes, Chemours still has a lot of debt and is rated BB, which isn’t great, but the yield is decent at over 4.1%, and if you normalize the company to realistic levels, the upside is enormous.

At a low normalized P/E level of 8x, that works out to 22% per year, using the 5-year average of volatility over the past 5 years.

With Chemours expected to grow 28% annually on average through 2026, and the company’s full-year performance beating expectations by 10% or more 50% of the time, I believe there is reason to be positive here. Even just estimating at a P/E of 14, that works out to 48% annual growth, or 175% through 2026, giving CC an estimated FV of $63. Even using just a P/E of 10, the estimated stock price is $42 per share, implying over 25% annual growth.

In my last article, I projected Chemours at approximately $30 per share. This is below my forecast, but given the current share price of $24 per share, I expect a 15% RoR per year. I am also increasing this price target as of this article. With the new forecast, new management in place, and an improving situation within the company, I am adding $5 to my forecast to raise it to $35. This is roughly 8.5x when normalized to a 22% annual upside.

The company remains subject to de-inventory trends, demand trends and the overall macro economy. Currently, there are many moving parts in the TT business and a large portion of the company’s business is contract-based, which means that there are contract lags in pricing and changes occur approximately every six months. With respect to some of these trends, leverage is actually expected to increase slightly in the second quarter before trending down again with generally favorable trends in the second half of the year.

As things stand, I’m back to being on hold on this company. However, I believe there is significant upside potential for this company given where valuations are currently at. That’s why I view this company as a buy. A speculative buy, but a buy nonetheless.

So, here is Chemours’ current paper and an update for summer 2024.

paper

• The company is fundamentally attractive thanks to its chemical portfolio, but is plagued by potential future and past legal issues and risks, as well as an unattractive debt profile. The recent disclosure is just the latest example of this. This one needs to be discounted, but that’s entirely possible. Keep your target below 10x P/E and a stock price below $35/share adjusted for new information, and remove some of that discount given the current upside potential.
• I maintain my Buy and Bullish ratings on CC with an overall price target of $35, which is below the current analyst average but seems reasonable given its peers and risk/reward comparison. As of June 2023, I have made some changes to my targets here and expect TT and other pieces to recover towards the second half of 2024, setting up a favorable 2-3 year trend.
• However, I maintain a clear “speculative” rating on this stock and am not planning on making it a core position in any portfolio at this time. However, I am increasing my position a bit.

Keep in mind, I am working on the following:

1. You buy undervalued companies (even if the undervaluation is only slight and not mind-bogglingly large) at a discount and let them normalize over time, earning capital gains and dividends in the meantime.
2. If a company becomes overvalued far beyond normal, I take profits, switch my position to other undervalued stocks, and repeat #1.
3. If the company is not overvalued and remains within its fair value range or goes back to being undervalued, I will buy more as time allows.
4. Reinvest earnings from dividends, savings from work, or other cash inflows as specified in #1.

Here are my criteria and how the company meets them:Italics).

• This company is overall high quality.
• The company is fundamentally safe, conservative and well-managed.
• The company pays a well-covered dividend.
• This company is currently cheap.
• The company has plenty of realistic upside potential based on earnings growth and expansion/reversion of its share price multiple.

As it stands, the company is still a Buy and meets all my criteria except for one – quality due to its non-IG rating – but it is highly speculative so you need to keep that in mind.