Shares of titanium dioxide (TiO2) manufacturer Tronox (NYSE:TROX) tumbled 11.3% during the month of May, underperforming the overall stock market as well as most of its chemical-industry peers. This came in spite of a positive first-quarter earnings report, released May 3.
On May 10, the company announced that CEO Tom Casey would retire from his position on May 15 for health reasons, but would remain as chairman of the board. Sadly, on May 26, Tronox announced that Mr. Casey had died: a very tough way to end a tough month for the company.
As a major manufacturer of the versatile chemical TiO2, Tronox shares often move along with the overall TiO2 market, as well as with its TiO2-producing peers like Kronos Worldwide , Chemours (NYSE:CC), and Huntsman (NYSE:HUN). And, in fact, that was true for most of the month:
Tronox's stock took a bit of a hit early in the month after it released its Q1 2017 earnings, despite a much-improved year-over-year performance. Revenue was up 20%, and TiO2 sales were up 33%. EBITDA (earnings before interest, taxes, depreciation, and amortization) was up 153%, while EBITDA from the TiO2 division was up an astonishing 286%. Better still for the company, TiO2 prices continued their steady rise, up 4% from the prior quarter and 16% from the year-ago quarter.
Casey had seen a bright future for the company. In a May 3 press release, he said:
We see the momentum in our TiO2 business continuing across the balance of this year and expect to benefit from additional pigment selling price increases, firming market conditions for titanium feedstock and co-products, continued margin expansion from top line growth in both pigment and historically higher margin feedstock as well as cost savings from our Operational Excellence program.
However, Tronox is still a company with issues: specifically, a balance sheet loaded up with $2.9 billion in long-term debt from the recent weak TiO2 market. Tronox's debt-to-equity ratio is higher than any of its peers, at 1.3 (Huntsman, the runner-up, is only at 0.7), and its debt-to-capital ratio stands at 75.5%; only Chemours -- which was loaded up with debt by its former parent DuPont -- is higher, at 91%. And now the company is searching for a new permanent CEO.
Looking at the stock's performance, however, it's unclear exactly why the stock slid further than its peers around May 23. Perhaps the lack of a permanent CEO concerned investors enough to sell their shares a bit faster than the shares of the other companies.
The TiO2 market began to slide in 2014 and bottomed out in early 2016. Since then, all the major TiO2 stocks have seen big gains. Those gains are likely to continue as the TiO2 market continues to improve. However, most of the stocks in the industry also have hefty debt loads, which makes them risky bets for the long-term investor.
Add to this the unfortunate leadership situation Tronox is now experiencing, and you'd probably be wise to pass on the company for now.