About six months ago, I looked at the Brazilian petrochemical company Braskem
Focusing in on the company's third-quarter results released yesterday, I see that revenue increased 13% to 3.27 billion reals versus last year's 2.91 billion performance and that earnings before interest and taxes increased 82% to 461 million reals. There's reason to believe that performance could have been slightly better, but the company had some reductions in its production of an intermediate (olefins) it sells and uses to produce thermoplastics.
The increase in revenues and EBITDA is nice, but I'm a bit more interested in the EBITDA margin. For its third quarter, Braskem's EBITDA margin was 14.1%. This is below the five-year average of approximately 20%, but above the second quarter and last year's third-quarter results of 8.9% and 12.9%. This is a positive sign of improvement, and the recent price movements in oil should help the company improve its margins a bit more via its purchase of naphtha, its largest feedstock cost. These results aren't quite as strong as those recently reported by Dow Chemical
During the quarter, the company also completed the repurchase of 13.1 million of its preferred class A shares. Given that the company was trading at prices that assumed a permanent compression of its margins at the time, I think the buyback was a smart and well-executed transaction.
With cash flowing into recent acquisitions, expansion, and the share repurchase, the company's cash flow performance isn't as strong as it has been historically. The currently depressed margins also don't help in this regard. However, as margins return to normal, I believe we'll see the company return to generating large amounts of cash flow and easily funding all of its maintenance and expansion needs.
Braskem isn't entirely out of the woods yet, though, and the company will always be beholden to the cost of its inputs and the market pricing of its outputs. There's little the company can do about that other than continue to drive its costs down as much as possible and opportunistically take market share. I think there's a good chance of this happening in the long term, and for those who are curious to follow the story, I recommend heading over to the company's site and digging through all of the details it provides on its operations and financial performance.
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Nathan Parmelee is a contributing analyst for Global Gains. At the time of publication, he had no financial position in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy. Dow Chemical is a Motley Fool Income Investor selection.