OEC - Orion Engineered Carbons: Right Time To Buy

Summary

• OEC posted FY22 and Q4 FY22 results with increased revenue.
• The stock is looking technically strong as it broke out of a resistance zone.
• OEC is undervalued compared to the industry standards with a lot of growth potential.
• I assign a buy rating on OEC stock.

Orion Engineered Carbons ( OEC ) manufactures and sells carbon black products. They sell their products in Germany, South Korea, South Africa, the United States, and internationally. The company operates in two segments rubber carbon black and specialty carbon black. They provide rubber carbon black products in tires and for applications in mechanical rubber goods. The specialty carbon black is used to tint, provide reinforcement, and add UV protection. They have innovation centers on three continents, with different varieties of production processes in the industry. OEC was founded in 1862. OEC recently announced its FY22 and Q4 FY22. In this thesis, I'll address their valuation while also analyzing their financial results. They have a strong potential for development, and the management has given upbeat revenue guidance for FY23. I believe it can provide significant returns to its shareholders. Therefore, I give OEC a buy rating.

Financial Analysis

OEC recently announced Q4 FY22 and FY22 results . They outperformed market expectations for revenue and EPS by 4.6% and 49%, respectively. The net sales for Q4 FY22 were $462 million, a rise of 17.7% compared to Q4 FY21. I think that a better pricing policy by the management, passing through higher feedstock costs, a positive product mix in both categories, and higher volume in the Rubber Carbon Black segment were the key drivers of this rise. The reported net income for Q4 FY22 was $12.2 million, a significant rise of 1009% compared to Q4 FY21. I believe the main reason behind this increase was better pricing measures and increased revenue from a by-product called cogeneration which benefited both the specialty carbon black and rubber carbon black segment.

The FY22 sales were $2.3 billion, a rise of 31.3% compared to FY21. The main aspect, in my opinion, that caused the increase, was the volume increase in rubber carbon black, and its sales also increased when compared to FY21. The net income for FY22 was $106.2 million, a decrease of 21.1% compared to FY21. I believe that the increased fixed costs and the unfavorable effects of foreign currency translation, which affected both segments, were the main causes of this reduction. I think OEC's financial performance in FY22 and Q4 FY22 was excellent because they were able to report strong financial results despite high inflation and unreliable energy sources.

Technical Analysis

OEC is trading at the level of $29.3. The stock saw a massive decline during COVID-19, but it steadily recovered. If we look at the weekly time frame, there is a huge resistance zone at $22, and the stock tested it multiple times during the last two years but failed to break. The stock consolidated near the resistance for the last two years, but last week it broke out of the resistance zone and gave a strong closing. The stock is looking very bullish, and In my opinion, it can give returns up to 50% from current levels; one can either enter the stock at the current levels or wait for the retest.

Should One Invest In OEC?

Despite the high inflationary pressure, negative foreign exchange rates, and Russia and Ukraine conflict, the company managed to generate high revenues. After the Covid-19 Crisis, they were able to recover fairly well, and their revenue has been steadily increasing. The management anticipates that FY23’s revenue will be around $2.2 billion, which is 12.3% higher than the FY22 revenue. I believe it will meet its revenue goals because of rising demand for its rubber carbon black, new products that the management has presented to its clients, improved pricing policy, and new factories they have established in North America. Also, their revenue has increased 31% year over year and 11.2% over the past three years, demonstrating their potential for growth.

They have a P/E ((FWD)) ratio of 9.57x compared to the sector ratio of 13.57x, which shows that they are undervalued. The second ratio is the PEG ratio, which is a reliable valuation metric for growth companies as it considers future earnings and growth. They have a PEG ((FWD)) ratio of 0.94x compared to the sector ratio of 1.94x. The third ratio is the Price / Sales ratio. They have a Price / Sales ((FWD)) ratio of 0.65x compared to the sector ratio of 1.19x. After analyzing all the valuation metrics, I think OEC is undervalued and has a lot of growth potential.

Risk

Their business operations are materially affected by global economic conditions. Carbon black is used in various groups of end products, and its demand has been historically related to the GDP and global economic conditions. Therefore, a global economic slowdown may result in less demand for their goods, which could adversely affect their revenues, cash flows, and balance sheet. In addition, their company experiences some inherent cyclicality because a sizable portion of their sales is directly influenced by the construction and automotive industries, which are both cyclical.

Bottom Line

In my opinion, OEC is undervalued with a lot of growth potential. Their revenue and income have grown significantly in the last three financial years. Moreover, the management is expecting positive revenue growth in FY23. In addition, the company is looking technically strong as it has broken out of an important range. As a result, I give OEC a buy rating, and I think it can provide its shareholders with meaningful returns in the future.

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