Shares of Chemours (CC 0.10%) have been under pressure all year, declining more than 40% by late November. That slump comes even though the company's adjusted earnings per share have skyrocketed more than 75% through the third quarter compared to the same period of 2017. As a result, the stock's valuation has become much cheaper over the past several months.
However, a lower price alone doesn't make the stock a buy. Investors need to dig a little deeper into the specialty chemicals manufacturer's prospects to see if shares have enough upside potential to make them worth buying.
The bull case for Chemours
Last December, Chemours hosted its first investor day, where it unveiled its outlook though 2020. The company noted that it had recently completed its five-point transformation plan, which enabled it to begin a new chapter. At the time, CEO Mark Vergnano said that Chemours expected 2018 to be an "another great year," as it anticipated that adjusted EBITDA would rise from $1.4 billion in 2017 to a range of $1.7 billion to $1.85 billion in 2018. The company believed that it would generate $500 million to $600 million in free cash flow this year even after investing in two new manufacturing facilities. Those growth-focused investments and other initiatives positioned Chemours to expand earnings per share at a more-than-15% compound annual growth rate while also setting it up to generate $2 billion to $2.75 billion of cumulative free cash flow by 2020. The company expected to return nearly $900 million of that money to investors via a higher dividend and share repurchases.
Chemours is still on track with that forecast roughly one year later. While Vergnano noted on the company's recent third-quarter conference call that adjusted EBITDA would come in toward the bottom half of its guidance range in 2018 due to a faster-than-expected decline in Ti-Pure titanium dioxide volumes, its share repurchase program has it on pace to achieve the high end of its adjusted EPS guidance range. Furthermore, the CEO stated on the call that "we remain confident in our ability to meet or exceed our three-year financial targets."
That plan to grow earnings at a fast pace while returning significant amounts of cash flow to shareholders through dividends and needle-moving share repurchases has the potential to create substantial value for investors in the coming years.
The bear case for Chemours
Chemours is a global leader in producing titanium dioxide, which is used to make coatings, plastics, and paper. As noted above, demand for that product has been weaker than expected this year because customers have been using up their inventories. However, there is some concern that this decline in demand might be due to deeper issues within the economy, which could continue to impact sales volumes if conditions worsen. It's also worth noting that the company anticipates that China will be a key growth driver, which is a concern given the growing trade war with the U.S.
Chemours had hoped to leverage its industry-leading positions in titanium technologies, chemical solutions, and fluoroproducts to grow its business at one to two times the rate of gross domestic product (GDP). However, if the global economy is slowing down, that could cause the company to grow at a slower pace than expected or even experience a decline in demand if there is a recession. Those worries have weighed on the stock over the past few months and could continue doing so. Adding to that is Chemours' $4 billion in debt, which is a lot for a company with a $7.7 billion enterprise value. However, with $1.3 billion in cash, its leverage ratio was a comfortable 1.5 at the end of the third quarter and would improve further if the company achieves its 2020 targets.
Verdict: Chemours is a buy
Even though titanium dioxide market is weakening, Chemours is still on pace to earn between $5.10 to $5.85 per share this year while generating $650 million in free cash flow. Despite that positive outlook, shares have plunged more than 40% and currently sell for around $28 apiece, which equates to a market cap of less than $5 billion. As a result, Chemours trades at about six times earnings and around 7.5 times free cash. That's dirt cheap, especially for a company expecting to grow earnings and cash flow at high rates in the coming years if market conditions remain stable.
Add that upside to the company's 3.5%-yielding dividend, and the company has the potential to deliver market-beating total returns in the coming years if it can achieve its long-term plan. While it could be a bumpy ride the interim, Chemours looks like a compelling stock to consider buying on the bet that it can hit its goals.