On Nov 27, we retained our Neutral recommendation on chemical and advanced materials maker Celanese Corporation (CE). While we are impressed by the company’s strategic actions to drive earnings, we remain on the sidelines considering softness in its core acetyl business.
Why Held?
Adjusted earnings for third-quarter 2013, reported on Oct 18, beat the Zacks Consensus Estimate but sales missed. Celanese expects earnings to rise this year and the next on the back of company-specific initiatives.
Celanese, a Zacks Rank #3 (Hold) stock, is still seeing weak demand and pricing in its acetyl business, as witnessed in the third quarter. Challenging economic conditions in Europe and sluggish growth in Asia may continue to impact acetyl demand.
Moreover, Celanese is exposed to raw material supply issues and cost pressures. The company’s balance sheet leverage is also relatively high, limiting its financial flexibility.
Nevertheless, Celanese’s strong presence in emerging markets will enable it to deliver incremental earnings in 2013. The company has taken up cost-cutting measures and the necessary steps to run its plants better to counter weak demand. Moreover, Celanese continues to generate strong cash flows and remains focused on returning value to its shareholders.
Celanese is aggressively expanding capacity in the emerging Asian markets. Its expansion initiatives in China are expected to support earnings growth. Celanese’s integrated chemical complex in Nanjing, China, serves as a base for expansion in Asia, supporting the region's increasing demand.
For 2014, Celanese expects earnings to be driven by company-specific initiatives including innovation of new products and enhancement of efficiencies through productivity that are expected to deliver roughly $100 million in incremental earnings next year.
Other Stocks to Consider
Other companies in the chemical industry worth considering include Methanex Corp. (MEOH), Asahi Kasei Corp. (AHKSY) and Johnson Matthey plc (JMPLY). All of them carry a Zacks Rank #1 (Strong Buy).
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