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Coverage Initiation: Celanese
Value Line has initiated coverage of Celanese Corporation (CE) in its flagship product, The Value Line Investment Survey. Celanese describes itself as “a global technology and specialty materials company.” The company is based in Dallas, Texas, and most of its operations and its 7,600 employees are located in North America, Europe, and Asia.
The company’s history dates back to late 1912, when three Dreyfus brothers established it in Switzerland as Cellonit Gesellschaft Dreyfus & Co. to produce fireproof celluloid out of cellulose acetate. It underwent some name changes, and in 1924, the future Celanese Corporation of America began producing cellulose acetate in Cumberland, Maryland. This company began trading on the New York Stock Exchange in 1930. Celanese was acquired by Hoechst AG in 1987 and became Hoechst Celanese in the United States. In 1999, Celanese was spun off into an independent entity and began trading on the NYSE under the symbol CZ. In 2004, Blackstone (BX) took the company private. Less than a year later, in January of 2005, Celanese resumed trading on the NYSE following an initial public offering.
Value Line has placed Celanese in its Chemicals (Diversified) Industry. This classification is apt for the company, which operates under seven business units, has numerous brand names, and serves a wide variety of industries. Celanese’s markets are diverse, as well; in 2011, 73% of its sales were from outside the U.S.
Acetic acid has been an important product line for the company since 1916. Celanese believes that its technology advantages give it a better cost position than its rivals. Another key product is ethanol, where management’s near-term focus is on China and Indonesia. Celanese doesn’t just produce commodity chemicals, however. It works with its customers to develop products to meet their specific needs. The company is also trying to develop new uses for existing product applications. To this end, Celanese has four research and development centers worldwide.
During its 101-year life, the company has made numerous acquisitions and sales of subsidiaries or assets. Celanese is still interested in acquisitions, with a focus on technology and/or access to new markets. Its most recent significant purchase was that of two product lines from Ashland (ASH) in early 2012.
Management has established goals for various financial measures. With 2011 as a base, it wants to improve its compounded annual earnings growth rate from 10% to 12%-14%. It wants to boost its operating margin from 16% to more than 18%. And it wants to raise its return on invested capital from 15% to more than 20%. These are ambitious targets, and there is no assurance that Celanese will attain them.
What should investors consider? The state of the worldwide economy is an obvious concern. China is an important market (Celanese has operated there for more than 25 years), and demand growth there exceeds that of most other major markets, especially with parts of Europe in recession and the U.S. economy expanding just slowly. The health of the economy can affect not only the demand for Celanese’s products but its pricing power, too. Another key factor is the cost of feedstocks such as natural gas, coal, and petroleum coke.
Conservative investors should be aware that Celanese is highly leveraged, and its securities are rated below investment grade by the credit-rating agencies. The company is addressing this, and has improved its debt-maturity profile. Celanese pays a modest dividend, but the yield of its stock (even after a 25% increase in 2012) isn’t high enough to interest income-oriented investors.
For a more thorough look at Celanese’s business prospects, and the particular investment merits of its stock, subscribers should examine our full report in The Value Line Investment Survey.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.