Summary
- AdvanSix Inc. has seen a strong 2022, but ended the year a bit softer than expected.
- This softness still translates into solid earnings here, yet net capital investments will eat meaningfully into 2023 cash flows.
- Valuations looks reasonable, but cash flows coming under pressure might cast some doubt on the valuation here.
- Given this, I am tempted to take profits here on AdvanSix Inc. after having enjoyed a nice run higher.
In September of last year, I concluded that shares of AdvanSix Inc. ( ASIX ) were no longer advancing, as its shares had seen a reversal in recent months despite arguably strong operating momentum. This was to be liked, although an earnings revision (to the downside) was in the making, making it a bit tricky to get involved.
Recap
AdvanSix Inc. was spun off from former parent company Honeywell International Inc. ( HON ) all the way back in 2016. The producer of ammonium sulfates, nylon, and chemical intermediates was seen as a commodity producer. Given a strong correlation between both input and output pricing, some of that volatility was hedged, albeit that there was still significant volatility witnessed on the bottom line.
At the time, AdvanSix was a $1.5 billion business which posted EBITDA of $200 million and net earnings to the tune of around a hundred million, with earnings power coming in at $3 per share, with the same shares trading at $40 per share at the time. Besides the concerns on cyclicality, I feared poor cash flow conversion (amidst a need to upgrade activities) and strong margins posted already, as well as increased focus on ESG practices to potentially hurt the business in the long haul.
Facing an uphill battle, I concluded to not be engaged with the shares as these shares drifted lower to $15 ahead of the pandemic, followed by a fierce rally to levels in the fifties in 2021 and 2022.
This was driven by a recovery, as 2021 sales rose to $1.7 billion on which EBITDA of $255 million and earnings of $140 million were reported, with full year earnings reported at $4.81 per share. In part the result of plant turnarounds, fourth quarter earnings only came in at $0.80 per share. With earnings trending between $3 and $5 per share and net debt down to $120 million, the company was in a better place after facilities were upgraded to an important extent as the company announced a $100 million deal for US Amines as well.
That said, 2022 was a tricky year amidst great demand for ammonium sulfate with parts of global food supply being endangered, albeit that higher energy prices hurt the business as well. Since trading in the fifties earlier in 2022, shares fell to $33 in September, marking a very significant pullback.
In the meantime the company posted a 27% increase in first quarter sales, on which $103 million in EBITDA and net earnings of $63 million were reported, equal to $2.15 per share. Second quarter sales rose as much as 33% to $584 million, with earnings up to $2.23 per share. Net debt fell rapidly given these strong earnings. Trading at around 4 times annualized earnings, it was clear that the market was not believing that these earnings could last, as the situation was quite comfortable for me to engage in.
Having initiated a small position at $33, shares have now advanced to $43 at the moment of writing, marking very decent gains of 30% over the time frame of less than half a year.
Advancements Continues
In October, AdvanSix provided some color on the third quarter results, indicating that more turnarounds were performed during the quarter than previously was foreseen. This was evident in the third quarter results which were released in November, with sales up 7% to $479 million, as EBITDA was down a quarter to $33 million, with GAAP earnings only coming in at $0.35 per share, and adjusted earnings only coming in eight cents higher. Net debt was cut to 110 million, despite the poor profitability in the quarter.
Fortunately, the company guided for fourth quarter revenues to rebound to levels seen in the first two quarters of the year. Full year capital spending of $95 million was set to exceed anticipated depreciation charges by around $25 million.
As reported today, that anticipated recovery only partially came to fruition. Fourth quarter sales of $404 million were actually down 5% on the year before, with volume declines posted at 15%, more than offsetting the impact of pricing and acquisitions. EBITDA improved to $66 million as GAAP earnings came in at $1.18 per share with adjusted earnings coming in nine cents higher.
For the year, AdvanSix Inc. posted $1.95 billion in sales, $309 million in EBITDA and $172 million in net earnings, with earnings reported around $6 per share. Net debt is down to $85 million, giving management sufficient confidence to announce another $75 million buyback program. With some 28 million shares outstanding, and these shares trading at $43, the market value comes in at $1.2 billion, for about an $1.3 billion enterprise valuation.
Upbeat Tone For 2023
For the current year, AdvanSix Inc. aims to benefit from long-term trends which drive demand for agricultural and fertilizer products, while expecting balanced acetone market conditions in North America. That is the good news, as capital spending is seen at $110-$120 million, creating some cash flow headwinds with depreciation charges reported at $70 million in 2022.
With earnings now trending at a wide $3-$5 per share range and the balance sheet being strong, the situation remains quite stable, with shares trading in the low forties. Amidst these observations, AdvanSix Inc. shares trade at 10 times volatile earnings, as the business operates from a strong financial position. That being said, net capital investments to the tune of $40-$50 million hurt cash flow conversion by as much as $2 per share on a pre-tax basis. This means that it likely will have a huge impact on anticipated earnings this year.
Given all of this, I am very tempted to take some profits on AdvanSix Inc. here, looking to enter a position again if shares might hit the lower thirties again this year.
For further details see:
AdvanSix - Muddling Through