One thing you can't say about Chemours Company (NYSE:CC) is that it's boring. The chemical industry stock has been on a roller coaster ride since it was spun off from DuPont -- now DowDuPont (NYSE:DWDP) -- in 2015. Shares immediately tanked, but then they soared...and crashed again. Currently, they're on a rebound.
But just looking at the share price isn't enough. There are three top factors that are going to determine how well Chemours -- and its stock -- performs over the long haul. Here's why the company might be at risk to underperform.
A cyclical market
Chemours' fortunes are tied largely to its biggest product: titanium dioxide. Often abbreviated TiO2, the versatile chemical is used in everything from cosmetics to animal feed. But it sees the most use as a white pigment in paint. So, when industries that use a lot of white paint -- like the automotive and construction industries -- are doing well, TiO2 prices and sales go up. When the automotive and construction industries falter, TiO2 prices go down and companies selling TiO2 suffer.
Chemours' big stock gains in 2016 and 2017 were largely thanks to hot automotive and construction markets. Global TiO2 demand was starting to outstrip supply, which allowed Chemours to start charging more for its signature product. Between the beginning of 2016 and the end of 2017, Chemours' net income had soared 394% on a trailing twelve month basis.
But the problem with up cycles is that they turn into down cycles, and that's what happened to Chemours in the latter half of 2018: revenue and net income peaked as auto and housing markets cooled and customers started working through existing inventories. In this case, there's not much that Chemours can do except wait for the next up cycle to begin. But if a global economic slowdown strikes, it may be a longer-than-expected wait.
Liabilities and liability
DuPont wasn't particularly kind to poor Chemours when it spun off the company. Not only did it load Chemours up with debt to the tune of more than $4 billion, but it also saddled the spinoff with a bunch of legal liability for -- among other things -- environmental damage and health problems caused by asbestos and chemical PFOA.
DuPont and Chemours managed to settle a major class action PFOA lawsuit in Ohio in 2017 for $334.5 million each, which was a huge win considering damages could have reached into the tens of billions of dollars. That was a big relief for Chemours' investors, but these lawsuits are like a game of whack-a-mole: another PFOA-related suit has been filed in North Carolina, and numerous environmental and asbestos lawsuits are outstanding. The company estimated in its 2018 annual report that it was facing more than 1,300 lawsuits on various subjects.
The good news for the company is that it has successfully settled a major lawsuit, and may be able to continue doing so, for comparatively modest amounts. However, one-third of a billion dollars (what Chemours shelled out in Ohio) still isn't chump change, and it seems to have contributed to Chemours' failure to pay down any significant portion of its debt load, which today still stands at just under $4 billion. That's a lot for a company with just a $6.6 billion market cap.
Despite these larger trends that seem to disfavor Chemours, the company has done an outstanding job of putting its shareholders first (perhaps a bit too outstanding a job...more on this later). The company has upped its quarterly dividend to $0.25/share from $0.03/share, and while this is still only half what the dividend was at the time of its spinoff from DuPont, it shows that Chemours is trying to reward its patient shareholders.
The company has also reduced the number of outstanding shares by 7.1% since the beginning of 2018, and has pledged to continue these efforts, in addition to growing the business to create shareholder value. Of course, if the company is sending its cash to shareholders via dividends and repurchases, that means it isn't using it to pay down significant amounts of debt, which could be more beneficial in the long run.
Still, management deserves credit for its commitment to rewarding company shareholders.
To buy or not to buy
There are worse investments you could make than buying into Chemours right now. A 2.3% dividend yield coupled with a shareholder-friendly management team and a comparatively low P/E ratio of 11.9 are all positives. It's certainly possible this stock could go way up.
On the other hand, the company's high debt load and unresolved legal liabilities, coupled with an uncertain TiO2 market mean that the stock could just as easily go way down. Imagine, for example, that a global economic slowdown socks Chemours' income just as a court hands down a big judgment against it. All the shareholder friendliness in the world wouldn't help the company raise capital without taking on more debt or slashing the dividend.
At this point, Chemours just seems too risky to be a buy for most investors.