The chemicals it produces are key inputs in the manufacture of plastics and coatings, including paints for roofing, siding and enamels, refrigeration and air conditioning, electronics, mining, and oil refining. The business comprises three segments: fluoroproducts, chemical solutions, and titanium technologies.
While some may view its business as boring, Chemours offers investors something to get excited about: a dividend currently yielding 6.5%, and a forward price-to-earnings ratio (P/E) to match. If an investor can find good enough reasons to feel comfortable, this could be the right time to open a position in Chemours. But there are no free lunches, so first, it's necessary to weigh the risks and downsides that have driven the stock to its lowest point since the company has traded independently.
Any large manufacturing company is likely to have litigation risks listed among its public disclosures, and it's unsurprising that a chemical company would have several. Chemours' situation, though, is more complicated because of its relationship to former parent DuPont. The agreement under which it was spun off leaves it responsible for potential liability in some cases where the independent company does not, and has never, produced the chemicals at issue.
Perfluorooctanoic acids (PFOAs), which were previously used by the performance chemicals segment of DuPont to manufacture industrial products including fire fighting foam, are at the heart of the company's litigation issues. In 2017, a DuPont case settlement included a payment of $335 million from Chemours. It also limited its liability from new cases for five years. But after that, Chemours will bear any excess costs.
As for the business itself, after a slow start to 2019, with lower volumes in the titanium technologies segment and operating challenges that it attributed to operating errors and start-up issues, management cut its guidance when it released its second-quarter results. The stock price fell and has yet to recover.
Management stated in its December investor presentation that it seeks to return "the majority of our Free Cash Flow to shareholders over time through a growing dividend and meaningful share repurchases." The chart below shows the company did execute on that goal, in the face of the falling stock price, and after the share repurchase program was increased from $750 million to $1 billion in February 2019. Operating cash flow from the business is sufficient, as the remaining free cash flow is shown below.
Misplaced confidence, or opportunity?
Returning capital to shareholders is a sign of management confidence, but it's not always a sign of better times ahead. The return-to-growth strategy mainly centers around two areas: a Ti-Pure Value Stabilization approach (to win back market share in that segment), and growth in Opteon, the company's low global warming potential alternative to the refrigerant freon. Even after pursuing growth by investing $500 million back into the business in 2019, the company has pledged to return the majority of its free cash flow to shareholders.
Heading into 2019, management expressed confidence that results from the titanium technologies segment in particular would improve significantly as the year progressed. That didn't happen, though by the third quarter, buying patterns had stabilized. Sales were up 10% sequentially, even as global average prices on the commodity held steady versus a year ago.
Management has a strategy in place, and the business and operational issues will likely improve. The uncertainties on that front, along with those related to ongoing litigation, have been priced into the stock, which creates a possible opportunity for investors. Management has shown it will return free cash flow to shareholders, which could make the stock a great investment at today's prices.
Chemours reports fourth quarter and full-year 2019 results after the close on Feb. 13, 2019. Updated news about both areas of uncertainty could tell investors whether this is the time to take advantage of the pessimism already priced into the valuation of its stock.