Why This Under-the-Radar Stock Is a Buy

Global chemicals and specialty materials company Celanese (CE -0.99%) definitely isn't a household name, but that shouldn't detract from its worthiness as an excellent investment option. Celanese has an attractive mix of near-, mid-, and long-term upside potential. For investors who like to find hidden gems lying off the beaten path, the stock is well worth a position in a portfolio. Here's why.

Near-term potential

Celanese's recent first-quarter earnings report highlighted the strength of the current trends in the business. Simply put, the recovering global economy is strengthening end demand for many of Celanese's products at a time when supply is tightening. The result is higher prices for many of its chemicals, which means higher profits for Celanese.

Image source: Getty Images.

For reference, Celanese is a manufacturer of intermediate chemicals and materials such as acetyl chain products used in coatings, paint, adhesives, paper and packaging, automotive products, electronics, and electrical products.

Investors can see the strengthening momentum in the dramatic increase in full-year 2021 earnings per share (EPS) guidance as the year has progressed. Indeed, the most recent increase in EPS is rather startling, considering that the Celanese investor day took place less than a month ago.

Data source: Celanese presentations.

CEO Lori Ryerkerk discussed the industry backdrop during the earnings call, outlining how acetic acid prices took off "again in China and really versus where we had been in March, which was around call it $700, $750. Really in the last many weeks, we've seen prices greatly increased. And now, we're sometimes over $1,000."

The increase comes as a consequence of "really robust demand since at least the fourth quarter of '20 as the world moved into recovery," according to Ryerkerk. At the same time, supply is tight due to Winter Storm Uri "taking three of four acetic acid production units in the U.S. offline. By our estimates, this resulted in a reduction in global acetic acid supply of approximately 5% for the quarter."

Meanwhile, the near-term outlook remains positive, as Ryerkerk believes Celanese's customers won't be back to "near-normal levels" of inventory until the third quarter.

Medium-term outlook

The pricing of Celanese's acetyl chain products is subject to the usual volatility around demand and supply, so it would be a mistake to assume prices are moving inexorably higher. Ryerkerk said she expected some negative impact from the slowdown in automotive production due to the semiconductor shortage to hit in the second quarter.

That said, there's reason to think the medium-term demand and supply dynamics will remain favorable. Ryerkerk believes there's been a "structural improvement in terms of demand for acetyl chain products" due to their usage in packaging, coatings, construction, and materials used to maintain infrastructure.

The price of acetic acid has soared in 2021. Image source: Getty Images.

While Ryerkerk's assumptions are subject to debate, it's fair to say that Celanese's major acetyl chain end markets (paints and coatings, adhesives, and paper and packaging) are in essential parts of the economy that will grow over the long term. Moreover, it takes a few years to build a plant to add significant capacity to the marketplace. Celanese has many of the lowest-cost production plants in the industry, and is in the process of doubling capacity at its Clear Lake plant by 2023 -- the lowest-cost acetic acid production plant in the world.

It all adds up to the company standing an excellent chance of exceeding its medium-term targets of adjusted EPS of $13-$14 by 2023, and cumulative operating cash flow of $4 billion to $5 billion in 2021-2023. Given that the cash flow target had $11-$11.50 in EPS for 2021 baked in (see table above) and management has already upgraded its 2021 EPS estimate to $12.50-$13.50, it's reasonable to assume Celanese can exceed its medium-term targets.

Long-term growth

Management's investments in productivity-enhancing technologies and rationalizing less productive plants has resulted in a significant improvement in underlying profitability.

To be clear, the price of many of Celanese's products will always be volatile and subject to ups and downs. However, over the last decade, there's been an upward shift in operating margins, even when revenue slumps due to lower pricing. That's great news for long-term profitability.

Data by YCharts

Is Celanese stock a buy?

Based on management's assumptions of adjusted EPS in the $11-14 range for 2021-2023 and $12.50-$13.50 for 2021, a worst-case scenario would result in in an average of $8.85 in adjusted EPS over the last decade, meaning the stock trades on less than 18 times its 10-year average earnings. That's a good value for a cyclical stock, and considering that margins have improved over the period, the next decade should see an even higher EPS generation in the future. All told, the stock is attractive for long-term investors.