What happened
Shares in specialty chemicals distributor Univar Solutions (UNVR) soared more than 12% in the week as of the close of trading Thursday. The move comes on the back of an excellent set of third-quarter results released on Monday.
As readers already know, the case for buying Univar rests on the idea that management's restructuring and refocusing of the company on specialty chemicals distribution will lead to margin expansion and substantial profit growth.
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Management's Streamline 2022 (S22) program calls for its earnings before interest, taxation, depreciation, and amortization (EBITDA) margin to increase to a run rate of 9% in 2022 from just 7.6% in 2019. It's a margin its peer Brenntag manages to achieve on a global basis, so investors have cause for optimism on S22.
The good news from the third quarter is that Univar dispelled any fears of a negative impact from well-documented supply chain constraints and transportation challenges. Although management did reference them in its press release, the reality is that for the third quarter in a row this year, management raised its full-year adjusted EBITDA guidance. It started the year forecasting $630 million to $650 million, and has raised guidance every quarter until it now stands at $770 million to $790 million.
So what
With the third-quarter EBITDA margin standing at 8.5% and excellent trading momentum behind it (driven by chemical price inflation, strong industrial end demand, and execution on S22 productivity actions), Univar is on track to hit its margin target.
As such, investors can feel confident penciling in earnings expectations. For example, Wall Street analysts have Univar sales at $9.37 billion in 2022; a 9% EBITDA margin means $840 million in EBITDA. The current enterprise value, or EV (market cap plus net debt), of around $6.7 billion implies a run rate EV/EBITDA multiple of just eight times EBITDA by the end of 2022. That looks like a good value.
Now what
Univar is not a high-profile stock, but it's attracting more investor attention due to consistently raising guidance as it marches toward its 2022 aims. As such, investors will be hoping for more of the same in the fourth quarter and guidance for 2022 that implies at least hitting the S22 target.
