2023-03-27 12:36:45 ET
Summary
- ECVT recently posted its FY22 and Q4 FY22 results.
- I think some uncertainties might affect its financial performance in the coming quarters.
- The stock appears to be stuck in a range.
- I assign a hold rating on ECVT.
Ecovyst ( ECVT ) operates in two segments, catalyst technologies and ecoservices. In the catalyst technologies segment, it provides customized catalyst products and solutions to polyethylene and methyl methacrylate producers. In the ecoservices segment, they offer sulfuric acid recycling services, virgin sulfuric acid for mining, and industrial applications. They recently posted their FY22 and Q4 FY22 results. In this report, I will analyze its financial performance and give my opinion on its future growth. I believe there are some uncertainties that might impact its financial performance in the coming quarters. Hence I assign a hold rating on ECVT.
Financial Analysis
ECVT recently posted its FY22 and Q4 FY22 results . The sales for FY22 were $820.1 million, a rise of 34.1% compared to FY21. I believe the main reason behind the rise was revenue growth in the ecoservices and silica catalyst segment. The revenue from the ecoservices segment rose by 40.4% in FY22 compared to FY21. I believe the higher volume for regeneration services and higher contract pricing was the main reason behind the rise in ecoservices revenues. The revenue from the silica catalyst segment grew by 6.3% in FY22 compared to FY21. I think the high demand for niche custom catalysts was the main reason behind revenue growth in silica catalysts. The net income for FY22 was $73.6 million compared to a net loss of $139.9 million in FY21. I believe the net income grew significantly due to no debt extinguishment costs and higher operating income.
The sales for Q4 FY22 were $182.8 million, a rise of 7.4% compared to Q4 FY21. The revenues from the ecoservices and zeolyst catalyst segments grew by 12.5% and 9.9% in Q4 FY22 compared to Q4 FY21, and I think outperformance in these two segments was the main reason behind revenue growth in Q4 FY22. I believe higher sales of catalysts into hydrocracking applications were the main reason behind zeolyst catalyst revenue growth. I think the rise in ecoservices segment sales was due to increased labor index and freight expenses due to higher contract pricing. The net income for Q4 FY22 was flat compared to Q4 FY21. The financial performance of ECVT in FY22 was quite impressive. Positive demand trends in the industry benefited them in FY22, and as a result, they were able to post impressive annual results.
Technical Analysis
ECVT is trading at the level of $10.4$. If we look at the chart, we can see that it has been trading between $8-$12 since November 2021. It is neither moving up nor going down the stock is currently directionless. It is now taking support from the 200 dma, which is at $10; in my view, one should only enter the stock when it breaks and gives a strong closing above $12 in a daily time frame. Until then, I believe there is no buying opportunity in ECVT.
Should One Invest In ECVT?
The revenue estimate for Q1 FY23 is around $160 million, which is 12.4% less than Q4 FY22 revenue. There are some factors that I think might have an adverse effect on the company's balance sheet, like the winter storm Elliot which occurred during the Q4 FY22 and affected its ecoservices segment. The storm affected its operations at many company sites, which impacted its production. Despite the storm occurring in Q4 FY22, I think its effects will be felt in Q1 FY23, like the repair and maintenance costs which will have an impact on the net income affecting the company’s balance sheet. In addition, due to the production outages, I think there might be a shortage of virgin sulfuric acid in Q1 FY23. The management expects the average sulfur prices in 2023 to be lower than the 2022 average. Therefore, the pricing benefits they enjoyed in FY22, which played a major role in its financial success, might not be able to be enjoyed in FY23. So I believe there are various uncertainties that they might face in Q1 FY23. Hence I would advise holding the stock and not taking any new positions.
Looking at its valuation. I will use P/E and PEG ratios to judge its valuation. The P/E ratio of a firm is calculated by dividing share price by EPS. It has a P/E ((FWD)) ratio of 10.38x compared to the sector ratio of 13.75x. It has a PEG ((FWD)) ratio of 0.43x compared to the sector ratio of 1.67x. The PEG ratio is calculated by dividing P/E by the company’s earnings growth rate. After looking at both ratios, I believe it is undervalued, but despite being undervalued, I think it is not the right time to invest in ECVT due to the uncertainties.
Risk
They are impacted by recurring technological advancements and ongoing product development in their work sectors. They must successfully develop, produce, and market new or improved products to keep their margins and stay competitive. As a result, they are forced to allocate a sizable number of resources each year to develop new products. Continuous expenditures on the research and development of new products might raise expenses without corresponding increases in sales. Additionally, there is a risk of technical or market failure for any new product program. This could necessitate allocating more resources to the project and prevent them from creating the new products necessary to keep their competitive position. Any unfortunate event might affect the company's business operations and balance sheet.
Bottom Line
Despite posting decent annual and quarterly results, I believe it is not the right time to invest in it. There are some factors that I think could affect its operations in Q1 FY23, and we might see its impact on the financial results. So I would advise holding the stock for now.
For further details see:
Ecovyst: No Buying Opportunity Despite Decent Financial Results