sanjeri/E+ via Getty Images

sanjeri/E+ via Getty Images

Our position with retail value investors has been, when investing gets dicey, to go back to the basics industries. We are bullish on the chemical and material sciences company Celanese Corporation (CE). Shares of CE and DOW, for example, are holding up despite the stock market's down winds.

Celanese is an American legacy, Texas company, founded in 1918. The chemical and material sciences company built a market cap of $17.24B. We believe the American economy will continue improving with some setbacks and CE products will continue to be in demand.

The SA Quant Rating is a strong buy. The share price is currently down 7.8% over the past year but up 76.3% over the past five years. CE is +10% over the past ~8 weeks. In our opinion, the current mid-$150s is an attractive price for the retail value investor.

In the same time frame, the Dow Industrial dropped about 15% over 2022. The Nasdaq -29%.

Quant and Factor Ratings (Seeking Alpha)

Quant and Factor Ratings (Seeking Alpha)

Celanese Corporation manufactures and sells performance-engineered polymers globally. The company functions in divisions: Engineered Materials, Cellulose Acetate, Food Ingredients, and Acetyl Chain. The Engineered Materials products are used in automotive and medical applications, industrial products, and consumer electronics.

The other segments provide chemicals like vinyl acetate-based emulsions. Customers use these materials in colorants, paints, adhesives, coatings, pharmaceuticals, construction, glass fiber, textiles, and paper applications. CE resins and compounds are in flexible packaging films, lamination film products, hot melt adhesives, automotive parts, and carpeting applications. CE manufactures ultra-high, molecular weight, polyethylene.

For pharmaceutical, agricultural, and chemical products, CE produces organic solvents and intermediates. It also offers a chemical sweetener for use in various beverages, confections, and dairy products, food protection ingredients, and chemicals for personal care products.

The global demand for basic industry materials is forecast to advance over the remainder of this decade at a CAGR of 4.6%. We expect the same for crop protection chemical sales, while chemicals used in fluids, building, and construction, industrial, automotive, and electronic goods might pop by 11%.

The Congressional Budget Office envisions in its 2022 outlook report a 3.1% growth in Real GDP. Unemployment will keep below 4% for this year and next. Consumers will have a steady income and are spending their largesse saved over the past few years. Consumer spending and demand for services are going to continue to be driving forces of GDP growth, according to the CBO report. This is a positive portent for basic industry companies like CE.

Household Saving Rate in the United States decreased to 4.40 percent in April from 6.20 percent in March of 2022. Source: U.S. Bureau of Economic Analysis

Household Saving Rate (Trading Economics)

Household Saving Rate (Trading Economics)

Celanese, like its counterparts, faces headwinds from a range of sources. CE gets a strong buy rating, but SA has three sells and one holds on CE's top four competitors' stocks. We expect the war in Ukraine to drag on and slow global growth. Growth topped 6% in 2021. We expect it will not be over 3.6% in 2022 and 2023. China and Southeast Asia countries are keeping manufacturing and consumers in lockdown mode from repeated pandemic outbreaks. The electric vehicle and driverless car manufacturing industry languish.

The chemical and material science industry is challenged to remain apace with accelerating innovation. Chemical and material science products result from highly complex information - informatics and cheminformatics - collected in data-driven labs. R&D is essential.

My biochemist son once told me his primary work pressure is speed; the time from idea to market has accelerated as the winning formula for corporations. Lori Ryerkerk, Chairperson of the Board & Chief Executive Officer of Celanese, touched on this in her April 29 earnings call. The share price has been slightly volatile, generating a Beta of 1.05.

First, CE is getting better deliveries of supplies, so "we're able to increase our volumes." But the company expects a sales slowdown in materials for the auto industry. In other industries, Ryerkerk thinks CE will benefit when customers drew down inventories, as the supply chain stalled. They are rebuilding inventories. A major positive is Celanese's commitment to R&D:

R&D Spending at CE (YCharts)

R&D Spending at CE (YCharts)

The first-quarter report released on April 28th beat all expectations. Revenue grew by ~55% Y/Y and 41.9% Y/Y for the quarter. Q1 net income rose to $502M. That represents $4.61/share. Last year for the same quarter the earnings per share were $2.82/share. CE's first quarter Q1 operating EBITDA was +43% to $813M with revenue. Revenue is expected to rise again in 2022 and 2023. Macroeconomic barriers and interest rate increases might temper earnings for a quarter or two. To see the financial statement click here.

We suggest being on the lookout for changes in two risk factors. Basic materials sales are cyclical. That presents a risk to the pace of growth and earnings. Sales link to the nation's economic health. Inflation, though, seems to stimulate better margins, rather than hindering them. Second, the cash-to-debt ratio is high, and the company does not hold enough cash on hand to pay off its debt. Management uses its cash and debt wisely and seems not to have trouble borrowing money for acquisitions. ~it seems to us these are low-risk factors but notable.

Momentum from the first quarter coupled with the anticipated growth of the larger economy leaves us with the inclination that the CE share price is on a growth continuum.

Celanese Corporation is expanding its business with the recent acquisitions of companies in plastics and polymer manufacturing. Celanese is paying $11B with Bank of America providing an $11 billion, 364-day senior unsecured bridge term loan.

The new business had a 2021 revenue of $3.5bn and profits before taxes of $800m. The purchase will more than double its engineered materials unit, which had $2.7bn in turnover in 2021. The new business will complement existing Celanese product lines. Celanese also completed takeover ELOTEX® Redispersible Polymer Powders and Specialty Additives; it sells building material additives for modern dry mix mortars in construction.

Grant Gigliotti does an in-depth analysis on the earnings and valuation with whom I agree is worth reading. CE shares are a value-buy with the Price-To-Earnings Ratio of 8.2x. The US Chemicals industry average is 17.3x, while the market PE ratio is 15.5x. These ratios and the anticipation for a growing GDP incline us to expect CE will reach an average share price target about 20% higher over the next 12 months into the $190 range, as the business expands.

We believe the stock will hit nearer to $210 if the war and inflation ameliorate. We expect the stock to outperform. Short interest is below 2% and hedge funds increased their holdings over the last quarter by almost 8M shares. The dividend yield is ok (less than 2%) but it consistently grows and gets high ratings for safety and consistency.

Finally, one word of caution for investors. Past performance is no guarantee for future revenue and earnings growth. The historical average of nearly 22% annual earnings growth is probably going to slow in 2022. depending on the health of the American economy, supply chain issues, the pandemic, US-China-Russia trade relations, etc. But over the long-term, the outlook in our opinion for CE is bright. The next report date is July 24, '22.

Experienced management leading CE is another reason to like the stock's potential. The average tenure is 6.4 years with CE. Lori J. Ryerkerk, the Chairman, Chief Executive Officer & President of Celanese Corporation, is a chemical engineer. Ryerkerk was named CEO in May 2019 following more than 30 years of management experience in the energy industry. Of particular note, debt-to-equity reduced from 97.4% to 77.2%; debt is covered by operating cash flow (51.2%); and CE earns more interest than it pays.

In May, management promised customers freedom from contractual obligations if there are spotty, "unanticipated interruptions in raw material supply." That move is a hallmark of customer service and commitment to transparency we would like to see across the corporate landscape. Perhaps this legacy contributes to CE being a century-old business still essential to the American economy; it solidifies our bullish position on the stock.

The company has significant revenue growth potential, is profitable, and faces few risks. Shares are most likely to continue the recent rise in price. America and the manufacturers across the world need the products Celanese sells.

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.