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Is Chemours a Buy?

By John Bromels - Oct 19, 2019 at 11:07AM

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The top titanium dioxide manufacturer has seen its shares tumble. Is it now a bargain?

It's been a rough year for Chemours (CC 0.12%). The DuPont (DD) spinoff has faced just about every possible challenge in the past 12 months, including lawsuits, operational issues, competitive threats, and -- of course -- a plummeting share price. 

Still, sometimes the market overreacts. Is the worst over for Chemours? Let's look a bit more closely to find out.

A paintbrush sits on a can of white paint

Chemours' top product, titanium dioxide, is a primary ingredient in white paint. Image source: Getty Images.

Lawsuit whack-a-mole

When DuPont spun Chemours off, it also conveniently unloaded many legal liabilities onto the new company, including ones related to the manufacture and discharge of various chemicals. In 2017, Chemours settled a major class action lawsuit regarding the chemical PFOA, an ingredient in its Teflon coating. In 2018, the company also settled a North Carolina lawsuit regarding contamination of drinking water for $13 million plus other requirements, including providing drinking water for affected areas.

Now, a class action shareholder lawsuit alleges that Chemours misled investors about the extent of its liabilities. Chemours is also suing former parent DuPont for either $4 billion or the acceptance of financial responsibility for some of the liabilities Chemours is facing related to Teflon and other legacy DuPont products. 

Chemours has been lucky so far that the judgments against it in these various suits have been comparatively minor. But the company has been embroiled in lawsuits for most of its existence, and there may still be more to come, given DuPont's long history as a chemical manufacturer and Chemours' liability for that history. 

A top product weakens

Chemours' biggest seller is a chemical called titanium dioxide, often abbreviated TiO2. This versatile compound is used in sunscreens, animal feed, and -- most importantly -- as a white pigment in paint. The automotive industry is one of the biggest markets for white paint, so when auto sales are hot, so is the market for TiO2.

Unfortunately, the global auto market seems to be cooling off, particularly in China. That's affecting Chemours' TiO2 sales. In Q1 and Q2, sales in the company's titanium technologies segment fell by more than 30% year over year. 

This weakness was a major reason why Chemours cut its 2019 EBITDA guidance by $400 million. Fully half of that was thanks to "lower earnings in our titanium technologies segment, due to weak market demand and share loss," according to CEO Mark Vergnano. 

TiO2 is a cyclical product, and it looks like we're decidedly in the down part of the cycle. 

Refrigerant sales cool off

Chemours' biggest seller is TiO2, but one of its other major products is the refrigerant Opteon. In Q1, Chemours reported slower Opteon sales, but blamed them largely on delays in getting a state-of-the-art Opteon plant in Texas up and running. These kinds of delays aren't unusual for major chemical plants, so that wasn't so concerning.

But in Q2, Chemours announced that it was facing pressure from what it termed "illegal imports of HFC refrigerants into the European Union, mainly from China." Those imports, according to Vergnano on the Q2 earnings call, were responsible for Chemours shaving $125 million off of its 2019 EBITDA guidance. 

Unfortunately, there doesn't seem to be a whole lot the company can do. Vergnano's prescription was, "We will continue to complain aggressively against this black market activity and to work with our industry partners and government authorities to control the flow of illegal refrigerants into Europe." Not much of a solution. 

As if that weren't enough, Chemours was simply seeing weaker demand for fluoropolymers like Opteon overall, which is expected to contribute to another $75 million hit to the company's 2019 EBITDA.

Tough times

So, here we have a company that's facing legal liabilities and uncertainty, weaker demand for its products, illegal competition that it seems pretty powerless to stop, and lowered expectations for 2019. That doesn't add up to a winning formula. Even bargain-hunting investors will probably be better off avoiding Chemours until its outlook improves. There are better stocks to buy.

John Bromels owns shares of DuPont. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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