On Wednesday, Deutsche Bank (ETR:DBKGn) upgraded Celanese Corporation (NYSE: NYSE:CE) stock from Hold to Buy, while reducing its price target to $110 from $135. The decision follows a significant 26% drop in the company's share price after its third-quarter earnings release. The bank's analyst cited multiple reasons for the upgraded rating despite the reduction in price target.
The analyst pointed out that the factors leading to Celanese's Q3 earnings miss and lower Q4 guidance were widely recognized across the chemical industry. These include a rapid slowdown in the automotive and industrial markets in the Western Hemisphere, especially the European auto sector, along with weak demand in the paints, coatings, and construction markets.
The shortfall in Q4 guidance was unexpected, but it was attributed to temporary measures such as the idling of facilities to reduce costs and inventory, which are seen as transient issues.
Celanese's recent 95% dividend reduction was viewed as a positive step by Deutsche Bank, suggesting that it should have been implemented two years ago when Celanese acquired DuPont (NYSE:DD)'s Mobility & Materials business. The analyst believes that deleveraging is now a top priority for Celanese and will significantly influence its share price.
Concerns regarding Celanese's liquidity, stemming from a new $1 billion term loan intended for repaying a maturing note in the first quarter of 2025, were deemed to be exaggerated. The company's projected free cash flow of over $1 billion in 2025 is expected to provide sufficient coverage, even in a non-full recovery year.
Looking ahead, Deutsche Bank forecasts growth in Celanese's earnings per share (EPS), from an estimated $10.50 in 2025 to over $13 in 2026 and $14.50 thereafter. The bank notes that the company's valuation is attractive based on these estimates and compares favorably with Celanese's five-year average price-to-earnings (P/E) and EBITDA multiples.
Finally, the analyst expressed confidence in Celanese's quality and its potential for leverage as markets recover, which is anticipated to begin in 2025. With the revised price target of $110, Deutsche Bank sees a 21% upside potential for Celanese shares.
In other recent news, Celanese Corporation announced a sharp decrease in its third-quarter net earnings, which fell by 87% to $120 million. This significant drop in profits has prompted the specialty chemicals maker to slash its quarterly dividend by approximately 95%, starting in the first quarter of 2025. The company also plans to implement additional cost reduction measures in an effort to save over $75 million by the end of 2025.
The company's engineered materials division has been hit hard by a downturn in commercial activity within the automotive and industrial sectors. In response to these challenges, Celanese has decided to temporarily shut down production facilities across all regions. This move is expected to generate cash through an anticipated $200 million inventory release in the fourth quarter.
Celanese's third-quarter results also fell short of analyst expectations, with an adjusted earnings per share of $2.44, compared to the predicted $2.85. The company's revenue of $2.65 billion was also slightly below the forecasted $2.7 billion. Looking ahead, Celanese projects a fourth-quarter adjusted profit of $1.25 per share, which is well below the average analysts' expectations of $2.93 per share, according to LSEG.
These recent developments come as the broader chemicals industry navigates through a period of lower demand, particularly in major markets like China and Europe. This challenging environment has been reflected in the financial performance of industry peers like Dow, which last month indicated a lower-than-expected revenue forecast for the fourth quarter.
InvestingPro Insights
Recent data from InvestingPro sheds additional light on Celanese Corporation's current financial position and market performance. The company's market capitalization stands at $9.94 billion, with a price-to-earnings (P/E) ratio of 12.3. This relatively low P/E ratio, coupled with an adjusted P/E of 8.09 for the last twelve months as of Q3 2024, suggests that the stock might be undervalued compared to its earnings potential.
InvestingPro Tips highlight that Celanese has maintained dividend payments for 20 consecutive years, demonstrating a commitment to shareholder returns despite recent challenges. The stock is currently trading near its 52-week low, which aligns with Deutsche Bank's observation of the significant price drop following the Q3 earnings release.
The company's revenue for the last twelve months as of Q3 2024 was $10.48 billion, with a gross profit margin of 23.7%. While revenue growth has been negative (-2.24% over the last twelve months), Celanese remains profitable, with analysts predicting continued profitability this year.
These insights complement Deutsche Bank's analysis, particularly regarding Celanese's valuation and future earnings potential. InvestingPro offers 12 additional tips for Celanese, providing a more comprehensive view for investors considering the stock's prospects in light of recent market developments.
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