Summary
- Ashland, Inc. has seen a great transformation over the past couple of years.
- The company has moved from a cyclical and leveraged business to a simpler and higher-margin specialty business.
- The move is much to be applauded, albeit that the Ashland Inc. valuation looks fair here with few immediate triggers on the horizon.
In November 2021, I believed that the transformation for shares of Ashland Inc. ( ASH ) was nearing its completion. This came after the company has been divesting non-core activities in the years before, with proceeds used for selective acquisitions, simplification of the business, and a reduction in leverage.
The transformation made sense, creating a stronger and more stable business, albeit that quite a bit of good news was priced in already.
A Recap
Ashland hit my investment radar in 2016 when the company floated a minority stake in Valvoline through an IPO, with Ashland being pressured by an activist investor to do so. Ashland's shares traded at $118 a share in 2016, as 62 million shares outstanding translated into a $7.3 billion equity valuation, albeit that the enterprise valuation was far higher amidst a $4.6 billion net debt load.
Net debt would fall a bit, as the company sold shares in Valvoline in the IPO, yet core earnings power would fall significantly as well. The company split the shares on a two-for-one basis in 2017 as the core business generated $3.7 billion in sales in 2018, largely from specialty ingredients, which were responsible for the majority of sales and all the earnings. GAAP earnings came in at $114 million, or $1.79 per share (post the split), with net debt down to $2.2 billion. A $70 share had moved up a bit, in part driven by another divestment. This came as Ashland announced the sale of the composite business in a $1.1 billion deal to Ineos.
2020 sales had fallen to just $2.3 billion, albeit that the lower leverage and huge earnings power made that adjusted earnings rise to $3.90 per share (or about $8 per share pre-split), as the company has seen huge margin gains over this period of time.
2021 - Moving Along
While the shares traded at $80 (or $160 pre-split) in 2021, the enterprise valuation of $7.0 billion had shrunken considerably from the $12 billion valuation prior to the Valvoline public offering. The company announced a EUR262 million purchase of the personal care business of Schulke & Mayr in 2021, only to sell its performance adhesives business in a $1.65 billion deal to Arkema. Despite this larger sale, adjusted earnings still came in at $3.75 per share, with sales down to just $2.1 billion.
So, effectively, Ashland has been embarking on an effective strategy to shrink the business, while demonstrating on great value creation for its investors. With shares at $106 late in 2021, the company traded at 26-27 times earnings power of around $4 per share. For 2022, the company guided for a roughly 10% increase in sales to around $2.3 billion, with adjusted EBITDA seen around $560 million.
This means that low margin and cyclical business has become very profitable, as the EBITDA guidance translated into an earnings number of around $4.50 per share, with leverage down to just the EBITDA reported.
Stagnation
The truth is that shares of Ashland have traded in a $90-$110 range since late 2021, now trading at $102. This makes that since late 2021, investors have seen zero returns over the past one and a half years.
In February 2022, the company posted first quarter sales with revenues of $512 million being up nearly 10% and the remainder of the results not warranting an update on the full year guidance. Later that month, the company closed on the deal with Arkema, with net proceeds seen at $1.2-$1.3 billion. Following solid second quarter sales results, the company maintained the guidance, even as some initial impact from inflation was seen. The company consequently hiked the quarterly dividend by 12% to $0.335 per share in May, while announcing a massive $500 million buyback program as well.
In November, the company posted full year sales at $2.39 billion, ahead of the initial guidance on the back of inflationary trends. Reported earnings from continuing operations came in at $3.20 per share for the year but $1.09 per share in the fourth quarter. Adjusted for (mostly amortization) charges, full year earnings came in $4.37 per share.
Net debt stood just over $600 million, virtually similar to the reported adjusted EBITDA number. The 2023 guidance was very comforting, with sales seen between $2.5 and $2.7 billion. Moreover, EBITDA is seen between $600 and $650 million, up from $590 million reported in 2022. At the midpoint of the guidance, a $35 million improvement in EBITDA is seen.
That should add about half a dollar on top of the adjusted earnings guidance in 2023, creating a realistic number of $4.50-$5.00 per share this year. In February, the company reported a mere 3% increase in first quarter sales to $525 million, on which adjusted earnings of $0.97 per share were reported as net debt rose to the $800 million mark. Furthermore, the company expects a slight shortfall to the midpoint of the adjusted EBITDA guidance issued late in 2022.
Concluding Remark
With shares trading at $102, Ashland Inc. trades at 20-22 times earnings, amidst leverage now reported to just over reported EBITDA. This all looks quite fair, as Ashland Inc.'s management should be given a great compliment for creating a lot of value in a disciplined manner over the past year through a very successful transformation.
All this for Ashland Inc. looks very interesting, but the heavy lifting is done, and so is the value-creating. Given all this, I am happy to see continued growth, as earnings multiples have fallen from 26 to 27 times in 2021 to about 20-22 times earnings growth, although it could move to the higher end given the anticipated pressure on earnings. This seems more than fair, despite the great operating performance being delivered upon by Ashland Inc.
For further details see:
Ashland: Risen From The Ashes