RealMoney Silver - Surprising Celanese Looks Ready to Ramp

Surprising Celanese Looks Ready to Ramp
By Bill Trent
RealMoney.com Contributor
4/10/2008 12:00 PM EDT

I've been taking a look at chemical maker Celanese (CE) , and I have to say I like what I see. I think the shares could rise 44% over the next year simply by expanding its P/E ratio to the average for its industry.

Originally based in Germany, Celanese was incorporated in Delaware in 2005. However, it continues to generate a significant portion of its sales outside North America. In 2007 the company earned 29% of its $6.5 billion in revenue in North America, 43% from customers in Europe and Africa, and the remaining 28% in Asia and the rest of the world.

Celanese is an industry leader in acetyl products and high-performance polymers used in a wide variety of industries. The company competes primarily with BASF, Du Pont (DD) , Eastman Chemical (EMN) , Dow Chemical (DOW) , Rohm & Haas (ROH) , and Air Products (APD) . Celanese claims to be the low-cost producer in the industry, an assertion backed by its industry-leading profit margin and return on equity.

Sales rose 12% in 2007 due to favorable currency effects and rising prices. The latter trend has, if anything, accelerated so far in 2008.

Percentage Change in PPI for Chemicals
(Year Over Year)

Click here for larger image.

Source: Bureau of Labor Statistics

Celanese has also shown itself to be shrewd when it comes to financial matters. Last year it took advantage of the then-favorable credit market to refinance $2.5 billion of debt, reducing its effective interest rates from about 10% to 175 basis points over LIBOR. It also borrowed to repurchase 1.5% of its shares, paying what now appears to be a bargain price of $30.50 a share in a Dutch auction.

The company recently authorized and began to implement a $400 million share repurchase. Based on its track record, the repurchase may indicate that shares remain a bargain.

As an early-cycle recovery play, there is of course some risk that a call on Celanese is, well, early. But I see no point in waiting around for a company that has beaten earnings estimates handily quarter after quarter. In the December 2007 quarter, the company earned 93 cents a share, compared to estimates of just 81 cents. Since then, per-share estimates for 2008 have risen to $3.74 from $3.66, and estimates for 2009 have expanded to $3.91 from $3.61.

The ongoing earnings surprises have not resulted in an excessive valuation. At 11 times current-year earnings, the price compares favorably to the industry average of 15.7 times, as reported by Hemscott. Its free cash flow yield of 4.3% is not eye-popping, but it compares favorably to the current yield on five-year Treasuries.

I also think the earnings at Celanese are of higher quality than those of its peers. In fact, its 0% accrual ratio indicates that there is essentially no distortion being caused by accounting accruals, compared to reporting earnings on a cash basis.

If Celanese were to trade at the average P/E multiple for its industry, its shares could rise to $60 over the next year. That would mark a gain of nearly 44% from current levels.

I think there is limited downside due to its already low valuation. There is also potential technical support at the 50-day and 200-day moving averages, both within 10% of the current share price.