Lately, titanium dioxide manufacturer Tronox (NYSE:TROX) has been flying high. Along with other TiO2 companies like Chemours (NYSE:CC) and Kronos Worldwide (NYSE:KRO), the company had a stellar 2016. Tronox shares rocketed up 146.7% last year as the TiO2 market finally started a long-overdue recovery.
But in February, Tronox shares again soared higher, to the tune of 30.6%. Here's why.
This time, it wasn't a case of a rising tide lifting all boats: Tronox's performance clearly outpaced its TiO2 rivals':
Only Chemours -- which rose higher on the news that it was settling a series of lawsuits unrelated to its TiO2 operations -- came close to matching Tronox's performance.
Almost all of Tronox's gains came on the heels of its earnings report on Feb. 21, when it reported stronger-than-expected sales, although it still reported an adjusted earnings loss. At the same time, the company announced it planned to sell its alkali business to acquire the privately held TiO2 company Cristal. That deal would create the largest TiO2 pigment supplier in the world.
Tronox's comparatively strong fourth quarter further strengthens the thesis that the TiO2 markets are marching toward a long-term recovery. Tronox CEO Tom Casey said as much in the company's earnings release:
We have said that 2016 marked the recovery in global TiO2 markets. Our strong performance in the fourth quarter continued to provide strong evidence of that. We expect the momentum generated last year to continue in 2017 based on our belief that pigment inventories, in the aggregate, are at or below normal levels at both customer and producer locations across the globe resulting in a continued tight supply demand balance.
So, it stands to reason that buying a competitor to create the largest supplier of an in-demand commodity is a smart business decision. The new company will have assets and operations on six continents, including 11 TiO2 pigment plants in eight countries with a total annual capacity of 1.3 million metric tons. That will indeed dethrone industry leader Chemours, which currently has annual production capacity of 1.25 million metric tons of the chemical.
The trouble with Tronox
Before you rush out to buy shares, though, you should know that it's not all sunshine and roses at Tronox. The company has posted net losses for each of the past three years, and while 2016's net loss was far smaller than the prior year's, the company still isn't profitable.
The balance sheet, meanwhile, is frightening, with just $248 million in cash and an eye-popping $2.9 billion in debt. About the only bright spot on this front is that the acquisition of Cristal is not expected to add any debt, but it will be funded instead through asset sales -- including the sale of the alkali business -- and Class A stock shares.
While the acquisition of Cristal is probably a smart move for the company -- and the timing is particularly good -- Tronox is still a struggling company with a nightmare of a balance sheet. Not to mention, the sale of the alkali business means Tronox will become a one-trick pony, completely dependent on -- and subject to -- the whims of the global titanium market.
While that titanium market is on an upswing, so are Tronox's fortunes, but the underlying issues with the company -- loads of debt, plenty of competitors, and chronic unprofitability -- should convince investors to look elsewhere.