Chemours earns investors' confidence
Investors are suddenly bullish on Chemours since it announced better-than-expected earnings two weeks ago.
The Wilmington-based chemical company's stock price has soared since announcing its third quarter results. But experts and company officials say faith in the company's future, not a solid third quarter, is actually driving up Chemours' stock.
"Stock prices are a reflection of what people think will happen in the future," said Jim Butkiewicz, chair of the University of Delaware's Economics Department. "This can't all just be because of one strong quarter. This indicates people think there will be better earnings going forward."
On Nov. 4, the last trading day before Chemours' third quarter earnings announcement, the company's stock opened at $16.64 per share. Since unveiling the quarterly results on Nov. 6, the stock price has continued the climb.
Nearly two weeks later, Chemours' stock peaked at $22.72 per share on Nov. 17. The stock dipped slightly during morning trading on Nov. 18, but remained strong at $22.65 per share.
That represents a 36 percent jump in stock price in just under two weeks, including a 13 percent gain on the Monday following the earnings announcement.
As recently as August, Chemours' stock was trading for roughly $9 per share and at the end of January, the stock was in the $3 range.
Chemours' stock had not been in the $20 range since June 2015, just before it was spun out from DuPont. The company has about 1,000 workers in Delaware.
A simple answer could be Chemours' unexpectedly strong third quarter. The company reported a net income of $204 million, reversing a trend of quarterly losses. As an independent company, Chemours had only previously had one profitable quarter— the first of 2016 — when it reported revenue of $12 million. Chemours lost $18 million last quarter and recorded net losses of $18 million, $29 million and $86 million in the second, third and fourth quarters of 2015, respectively.
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Chemours' third quarter results bested consensus analyst forecasts in several key metrics. It recorded a third quarter earnings per share of 61 cents, nearly double analysts' prediction of 30 cents per share. The company's quarterly earnings before interest, taxes, depreciation and amortization was $268 million, almost $70 million more than had been forecast by New York investment firm, Jefferies Group, and more than a $100 million improvement over the same quarter in 2015.
The quarter shows a much more stable Chemours after a difficult start as a new company, said John Roberts, an analyst with UBS Global Securities in New York.
"I think they've turned a corner," Roberts said. "I think that's apparent in the results, which have been up meaningfully."
Investors appear to agree. As Chemours' stock value increased over the past week, plenty of buyers still materialized at the higher price tag. A sign, Butkiewicz said, that investors also believe in a Chemours' turnaround.
"The people who are paying these prices have an expectation that the future is going to be as good or better than the third quarter as opposed the previous quarters," he said.
When Chemours launched in July 2015, some investors had concerns about its future. DuPont packed the company with nearly $4 billion of debt, environmental remediation and legal costs for 190 sites across the country. It also held some outdated products, including Teflon, which is experienced decreased demand over health concerns.
Investors were nervous and Chemours' stock price, which opened at $22.25 per share on June 22 — the first day it could be bought and sold — plummeted to around $9 per share within two months.
CEO Mark Vergnano unveiled the company's five-point transformation plan in August 2015. The plan is focused on reducing costs, overhauling the portfolio, refocusing investments, growing market positions and improving the organization. After a series of disappointing quarters, investors abandoned the stock,
But company executives had faith in the transformation plan. Mark Newman, senior vice president and chief financial officer, said that belief was rewarded this month with strong results and investor excitement about the future.
"I view the third quarter as the culmination of a number of efforts around our five-point transformation plan," Newman told The News Journal. "It was a lot of efforts that had already been underway and came together resulting in a fairly dramatic year-over-year improvement."
Stock owners buy for the future, not the past. So, investors appear to be betting the company is not only sustainable, but poised for growth.
"The stock price shows the market believes in our transformation plan," Newman said.
Roberts said that two major products, titanium dioxide and the Opteon refrigeration line, will fuel that growth.
Titanium Dioxide, or TiO2, is a pigment used in sunscreen, paint and coatings. It has experienced a pricing rebound. TiO2 prices were at rock bottom in December 2015, but have trended upwards since the beginning of the year. That is good news for Chemours, the world's largest TiO2 producer.
And demand is expected to increase in 2017 with Donald Trump's election. Trump made rebuilding America's infrastructure one his biggest campaign pledges. Roads, schools, airports and hospitals will likely require a lot of paint for their upgrades.
Chemours recently made a major investment in building a TiO2 plant in Altamira, Mexico, which will enable it to ramp up production and reduce manufacturing costs by $20 million annually.
Demand for the Opteon line of environmentally friendly refrigeration products has also been strong. Chemours announced two-high profile sales this year. Dutch supermarket Ahold is using Opteon XP40 to renovate the refrigeration units in its 175 stores across the Netherlands. And Johnson Controls, a Milwaukee based conglomerate that produces everything from car batteries to HVAC systems, announced it will use Opteon products.
Those deals pushed sales in Chemours' Fluoroproducts unit to $591 million, a 3 percent gain from the previous two quarters. Opteon is a relatively new product for Chemours with the XP40 line launching two years ago.
Newman said 2017 could be even bigger for Opteon. A European Union mandate requiring cooling units to use fewer greenhouse gasses will be in full effect next year. Starting in 2017, every new car sold in the EU will require an air conditioning unit that complies with the new regulations. Chemours is only one of two suppliers of the technology necessary to allow cooling units to lower emissions.
"At the time of the spin, Opteon was in its early stages and investors were less focused on that product," Newman said. "After seeing the results in quarter three and understanding the potential for Opteon growth as we go into 2017, there is an increasing awareness that Chemours is not just at TiO2 company."
Roberts said investors were also excited to see Chemours' lower its debt load and decrease expenses. So far this year, the company has retired about $315 million of long-term debt, reducing its interest payments by $19 million annually.
Separately, Chemours has reduced its overall expenses by more than $100 million, including $60 million realized in the third quarter. Those cuts, combined with the reduction of debt, have improved cash flow and liquidity. Chemours has targeted $350 million in cost reductions by the end of this year.
"The short-term earnings improvement were driven largely by cost reductions, but there is the underlying TiO2 pricing and Opteon sales that has allowed people to look longer term about this business," Roberts said.
Roberts said the proof of the turnaround plan's value is reflected in the stock price.
"Chemours' management went out with a profit improvement plan that was just a piece paper to the investment community, but now it is evidence on why people should believe in Chemours," he said.
Contact Jeff Mordock at (302) 324-2786, on Twitter @JeffMordockTNJ or jmordock@delawareonline.com.