KOP - Koppers Holdings: Strengthening Top And Bottom Line Results

2023-12-19 07:48:56 ET

Summary

• Koppers Holdings operates in a niche market, focusing on specialised chemicals and treated wood products.
• The company's competitive advantage lies in its diversification and innovation, catering to industries with rising demand for sustainable products.
• Challenges include regulatory compliance, market fluctuations, and supply chain stability.

Koppers Holdings Inc. ( KOP ) operates in a niche market, focusing on specialised chemicals and treated wood products. It has beaten EPS expectations for the last five quarters, including the most recent Q3 2023 . The stock has rewarded investors with returns of 55.51% over the previous year. The company expects to finish FY 2023 with its strongest financial position since 2017, with the normalised market position for all of its segments, not including Carbon Materials and Chemicals, which also negatively impacted its last quarter due to short-term headwinds in the market.

The company sets itself apart from its competitors through a diversification strategy, growing its focus on sustainability and investing in profitable projects. However, investors should be cautious of the industry's challenges, such as regulatory compliance, market fluctuations, and supply chain challenges. We can see that the company has improved its top and bottom line results consistently YoY, and its TTM results indicate strong upward trending results for FY2023, with the company expecting its best results since 2017. Therefore, investors may want to take a bullish stance on this stock.

Company Overview

Koppers operates across the US and internationally, specialising in treated wood products, wood preservation chemicals, and carbon compounds across its three main business segments: Railroad and Utility Products and Services, Performance Chemicals, and Carbon Materials and Chemicals. Koppers' top-line growth benefits from its diverse segments. We can see that there has been YoY growth across all segments over the last nine months. Although Q3 2023 shows a YoY decline for carbon materials and chemicals.

Koppers' effort to grow sustainable alternatives, such as providing wood-derived carbon compounds for aluminum and lithium-ion battery manufacturing, aligns with the increasing market demand for sustainable products. This initiative not only strengthens the company's market position but also reflects its commitment to meeting sustainability needs. Additionally, Koppers' ongoing investments in enhancing safety, productivity, and growth across all its segments underscore its effort to improvement and operational expansion.

As Koppers operates across a number of segments, it faces competition from a number of companies. One example is Stella-Jones, a leading provider of pressure-treated wood products. In the chemicals industry, competitors include companies like KMG Chemicals and CMC Materials. Additionally, in the carbon compounds, it faces competition from various specialty chemical manufacturers.

Koppers is expecting to have its strongest performance since 2017 and anticipates sales of about $2.1 billion in the coming years. This is a significant increase compared to $1.98 billion in the prior year. Additionally, the company is projecting an adjusted EBITDA of around $253 million to $257 million by 2023, which is a growth from $228.1 million in the previous year. Looking ahead, Koppers expects to report adjusted EBITDA of $300 million by 2025, which is a promising sign for the company.

Financial Overview

Prior to FY2022, the company had been reporting relatively flat top-line results. TTM results and the company's guideline for FY2023 indicate that the company is on its way to top the prior year's results, which is promising to see for investors. Consolidated sales for Q3 increased 2.7% YoY to $550.4 million. The company reported a net income of $26.3 million, marking an increase from $19.1 million. If we look at adjusted EBITDA, it was at $70.7 million, slightly up from $68.8 million in the prior year quarter.

If we look at the company's quarterly earnings history, we can see that the company has been beating EPS expectations and also increasing its EPS per quarter for the last four quarters. EPS normalised estimate for Q4 2023 is $0.78. This indicates that the company is doing well to operate efficiently and increasingly profitably.

If we look at the balance sheet, the company has a total cash of $57.7 million. Its total debt stands at $948.00 million, giving us a high total debt-to-equity ratio of 199.16%, which we should be cautious of. However, if we look at the company's current ratio of 2.24 and its quick ratio of 0.96, we can see that the company can cover its short-term liabilities.

Valuation

According to Seeking Alpha's Quant rating, the company has received a C grade. However, its valuation metrics are better than the materials sector. The stock has shown impressive growth over the last year, outperforming the S&P 500 for the last four quarters. It has a low FWD price-to-earnings ratio of 10.27, which is well below the sector median of 16.31. Additionally, its price to sales ratio of 0.45 indicates that investors are paying less than a dollar for every dollar sold. However, it is important to note that this is a risky stock due to price fluctuations in raw materials. Despite this, I am optimistic about the company's future because it is expected to end this year with its strongest financial position since 2017. The company has also invested in larger capital projects that are expected to generate $275 million in adjusted EBITDA by 2024.

Risks

Koppers faces several risks that investors should consider. Market dynamics have led to pricing pressures, particularly in segments affected by changes in the rail environment due to precision scheduled railroading and pandemic-induced disruptions. Furthermore, the company has some long-standing contracts that limit the company's ability to adjust prices to cover significant cost increases, potentially impacting margins and profitability. Another issue is regulatory compliance, especially in chemicals used for wood preservation, which are subject to stringent environmental standards. Any shifts in compliance requirements could escalate operational costs or necessitate manufacturing process modifications. Additionally, as Koppers diversifies its product portfolio to align with environmental concerns, regulatory changes may affect its competitive pricing and market position.

Final Thoughts

Koppers has consistently exceeded EPS expectations for five consecutive quarters, showing a 55.51% one-year return, and anticipates a strong FY 2023 finish. Despite industry challenges like regulatory compliance and market fluctuations, its diversified product line and focus on sustainability offer promising growth prospects. Although cautious of the risk of performance depending on raw material pricing and contractual limitations affecting the company's price adjustments. The company has shown strong upward performance and invested in projects that should benefit the company's EBITDA in 2024. Therefore, investors may want to take a bullish stance on this stock.

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