Warren Buffett has been on a buying spree this year amid the market meltdown. During the first quarter of 2022, Buffett's Berkshire Hathaway added 16 new stocks to its portfolio. One of these new stocks is Celanese (CE 1.31%), a global chemicals producer. At the end of the first quarter, Berkshire had a more than 7% stake in the business.
Buffett is a fan of companies that generate plenty of free cash flow and have defensible positions in their industries, and Celanese fits the bill here. While it's not exactly a household name, this chemist's work is found all over the place. However, that hasn't spared it from a 34% decline so far in 2022, far worse than the S&P 500's 19% drop. Is this Buffett stock a buy now?
A chemical portfolio for everyone
Celanese has a huge portfolio of polymers and plastics, emulsions, cellulose, and other chemical products. These base products show up all over the place in paints and construction materials, clothes, medical devices, pharmaceuticals, electronics components, even food. Some top featured use cases on Celanese's website include 5G mobile network base stations and electric vehicles.
Though it has a hand in the production of some of today's top-trending tech trends, this is not a growth company. Chemicals that Celanese specializes in have already proliferated throughout the global manufacturing supply chain. Rather, this company is all about managing the bottom line. As is the case with many industrial materials producers, Celanese is an active acquirer and frequently enters new manufacturing joint ventures with other businesses.
Most recently, Celanese entered an agreement to acquire the Mobility and Materials (M&M) segment from its peer DuPont for $11 billion in cash. DuPont's M&M unit generated sales of $3.5 billion in 2021. Celanese will add the product line to its own automotive and industrial plastics segment.
Basically, this is not a sexy high-growth stock, but that's what can be expected from a Buffett stock. So why Celanese now? Maybe it was designed to be a bet on the inflation of basic materials prices -- although inflation and an uptick in Celanese's revenue this year haven't saved Celanese's stock from the market turmoil. More likely, though, Buffett and his company's interest in Celanese had to do with the price tag.
A cheap stock you need to buy now?
Celanese's stock can currently be purchased at a cheaper value than what Berkshire initially paid for it back in Q1. At recent prices, shares trade for a meager 8.5 times trailing 12-month free cash flow and less than 7 times current-year expected earnings. Even for a company with minimal amount of growth expectations, this is a compelling value.
Granted, the market seems to be discounting risk from the DuPont M&M acquisition. Celanese will need to take out new debt to finance the purchase, and it wasn't exactly a cheap price tag (DuPont M&M generated only about $800 million in operational EBITDA last year, so the $11 billion price puts a bit of a premium on the business). Nevertheless, Celanese is highly profitable and shouldn't have too much trouble digesting the big purchase. Celanese generated free cash flow of over $1.4 billion in the last 12-month stretch for a healthy free cash flow margin of 15.6%. The company had $614 million in cash and short-term investments and $3.99 billion in debt at the end of Q1, not an unreasonable amount for a capital-intensive manufacturing operation.
Besides trading on the cheap, Celanese is also a dividend stock -- it pays an annualized yield of roughly 2.4% a year. The company has been aggressively raising this payout over the last decade, with annual dividends paid up nearly 1,000% since 2012.
So is Celanese a buy? Maybe. Here are a few things that might sway you.
- Celanese is a top chemicals company that should generate stable revenue and profits over time.
- The company pays a dividend, making it ideal for investors seeking income.
- Shares could be a long-term value after the steep tumble this year.
Granted, if you already own shares of Berkshire Hathaway, you might not need to add Celanese to your portfolio. After all, there are lots of great dividend stocks out there, so I see no need to over-allocate to this one in particular. And if you're a growth-oriented investor, pass on Celanese. There are better stocks to ride secular growth trends like 5G mobile and self-driving cars.