Specialty materials manufacturer Celanese (CE -0.40%) has the attention of Warren Buffett's Berkshire Hathaway (BRK.A -0.28%) (BRK.B -0.68%), which bought shares of the stock beginning in early 2022. It hasn't been a great investment so far for Buffett and Berkshire as the stock is down more than 35% over the last year.
Trading on slightly more than 8 times estimated forward earnings and sporting a 2.7% dividend yield, Celanese is, conventionally speaking, a cheap stock. Yet the market appears to have some worry about the stock. Here's what you need to know about this company if you are considering buying stock in it.
What the market is worried about with Celanese
Given the extremely low valuation, it makes sense to look at the three main concerns with the stock right now.
First, there are clear signs of slowing in the economy, with output and new orders currently contracting. Celanese chemicals and materials are used in everything from the automotive sector to paints and coatings, food and beverages, construction products, consumer and industrial products, paper and packaging, etc. Given the breadth of exposure to the economy, it's inevitable that the company's demand outlook is under threat.
The threat gets even more significant when considering that chemicals and materials prices tend to be highly cyclical. All it takes is a relatively small drop in demand for prices to fall substantially.
Celanese acquires a business
Second, Celanese recently completed the purchase of the majority of DuPont's (NYSE: DD) former mobility & materials (M&M) segment for $11 billion in cash. It's subject to criticism for several reasons. It adds debt to Celanese's balance sheet, and buying a business (in cash) just as its end markets are slowing isn't usually the best idea -- especially when borrowing costs have risen more than management expected at the time of the deal agreement.
Indeed, quoting Celanese CEO Lori Ryerkerk on the third-quarter earnings call in November, "it's fair to say, in the third quarter, much like the first two quarters, M&M is not performing in line with our expectations of the business or even in line with how they performed in 2021."
Furthermore, it's worth noting that the mobility & materials business actually increases Celanese's cyclical exposure due to its heavy focus on automotive, consumer, and electronics end markets.
Wall Street doubts management's guidance
Third, the Wall Street earnings consensus implies Celanese will miss the low end of its earnings guidance for 2023. On its investor day presentation in 2021, management laid out guidance for EPS of $13 to $14 in 2023, and it stood by that guidance on its last earnings call. However, the Wall Street consensus is for $12.92 in 2023, and with end demand conditions worsening, notably in Europe, the market's estimates could be lowered.
The long-term view on Celanese
These three points are concerning, but they are, at least to some extent, already reflected in the stock price and the valuation. As noted in the introduction, the market's earnings estimate for 2023 puts Celanese on slightly more than 8 times earnings.
Moreover, the thinking behind the Berkshire Hathaway position is likely a reflection of the company's long-term earnings potential rather than a near-term vote on next year's earnings.
That's an approach Celanese's management is taking, too. For example, despite the problems at the business acquired from DuPont, management recently upgraded its estimate for cost and revenue synergies from the deal to $500 million from $450 million at the time of the deal. Meanwhile, the acquisition expands Celanese's geographic footprint, notably in Asia, and enhances its position in polymers. As for the deal's timing, it's obviously unfortunate, but it's not easy to predict where the economy will be in a few months, let alone a few years, and the latter really matters for long-term investors.
Is Celanese a stock to buy?
There's little doubt that Celanese faces a challenging period, but its dividend is sustainable. If management is right about the synergies and cash generation potential from its significant acquisition, then plenty of dividend increases will come in the future. The economic cycle will inevitably turn again, and investors can enjoy a 2.7% dividend yield while they wait for it to do so.
Buffett and Berkshire Hathaway are not known for taking big macroeconomic bets. Still, they are known for understanding how a company can improve its return on assets and cash flow generation in a mature industry -- precisely what Celanese is trying to do now.
