Three. Hundred. Percent.
That's how much the stock of chemical company Chemours (CC 2.95%) grew last year. It's all the more impressive considering that Chemours, a DuPont (DD +0.00%) spinoff, is in the sleepy chemical and materials science industry, and it isn't even a major player in the industry at that.
But its stock continually posted double-digit monthly gains in 2016, month after month. Here's why those figures aren't so impressive, and why the stock's tremendous run may have come to an end.
Titanium dioxide, a white pigment, is Chemours' major product. Image source: Getty Images.
Out of the hole
The company's 2016 performance, when viewed out of context, certainly looks impressive. It absolutely flattened the S&P 500, as well as former parent company DuPont:
But 2015 was a different story. When DuPont spun off Chemours in July 2015, it loaded up the spinoff with massive legal and environmental liabilities as well as $4 billion in net debt. The stock promptly sank, losing more than two-thirds of its value by the end of the year. So even with 2016's big gains, investors who ended up owning Chemours only briefly found themselves ahead of the market late in the year:
But by the end of the year, the stock had given back some of its gains -- possibly due to original shareholders getting out while the getting was good -- and was now losing to the market, albeit barely. And yet, Chemours still has the same liabilities that it had when it was spun off. So why did the stock rise so far, so fast?
A banner year
The company had a truly banner year. Its second and third quarters were particularly impressive. In the second quarter, the company not only beat earnings estimates and cut costs, but also made progress in paying off its mountain of debt, reducing it by $92 million. The good times continued in Q3, as the company again beat earnings estimates, reduced costs, and paid off another $115 million of debt.
An improving market for Chemours' major product, titanium dioxide, helped to improve the company's fortunes. Titanium dioxide, a major white-paint pigment, is essential in the housing and automotive industries. Both industries had banner years in 2016, so the market for titanium dioxide began to recover, allowing Chemours to raise its prices for the chemical -- not once, but three times over the course of the year.
Despite all this success, though, Chemours remains a risky investment: Those legal liabilities mentioned earlier are starting to cause problems for the company...and headaches for its investors.
The agony of defeat
The legal liabilities revolve around a chemical called PFOA that DuPont used in the production of Teflon (a product now owned by Chemours). PFOA is pretty nasty stuff, so when a DuPont plant in West Virginia released some into the water supply, tens of thousands of people were affected. Approximately 3,500 of them have sued DuPont alleging PFOA-related health problems, including cancer.
Three bellwether cases ended in judgments against DuPont for a total of $9.2 million in damages (although the company is appealing all of them). Multiply those kinds of multimillion-dollar judgments by 3,500 plaintiffs, and you get numbers that could easily run into the billions of dollars, or even tens of billions. To put that into perspective, DuPont's annual revenue in 2015 was only $25 billion, and Chemours' entire market cap is just over $4 billion.
Chemours might be forced to shell out most, if not all, of those payments -- if it can even afford them -- because it indemnified DuPont against all PFOA-related cases as part of its spinoff. Recently, though, it has made statements casting doubt on the extent of its liability. But somebody's going to be on the hook for those payments, and investors should want to make sure it isn't them.
Investor takeaway
Chemours' stock had a dismal 2015 and an amazing 2016. It's hard to tell what 2017 will bring. On the one hand, an improving economy and continuing recovery in the housing and auto markets bode well for the company's business. On the other hand, massive legal liabilities could strike a crippling blow to the company's balance sheet.
There are plenty of other companies poised to take advantage of the economic situation, though. Many of them pay decent dividends -- compared to Chemours' paltry 0.5% current yield -- and few have the legal liabilities with which Chemours is saddled. There are better, safer places for your money.
