2023-03-09 06:14:52 ET
Summary
- I've been writing on Olin a few times for the past few years, with several articles in 2022. All of my articles have been positive, and I own some shares.
- The company, since my last article, has outperformed the S&P 500 by a small margin - around 3%. Still, outperformance demands highlighting.
- Olin is one of those businesses I consider to be "good". In this article, I will remind you why that is, and what my thesis for 2023 for Olin is.
Dear readers/followers:
Do you remember the Olin Corporation (OLN)? I've written about this business a few times - it's an undercovered and underappreciated chemicals business, which obviously is something I invest quite a bit of capital into. Chemical businesses are a big thing for me, with names like BASF ( OTCQX:BASFY ), LyondellBasell ( LYB ), and Dow (DOW) being part of my portfolio to various names. Olin isn't as big as these, not even close, but it's still a good company that's convinced me on the basis of strong fundamentals and good performance, that it deserves your consideration for 2023.
Seeking Alpha Olin Article (Seeking Alpha)
Outperformance deserves highlighting, even small outperformance. So let's look at this company's forecast and guidance for the coming year to see why this investment could be a good one for you to make.
Olin Corporation - The upside exists
Olin is, as mentioned, a solid chemicals business. While Olin isn't my largest in any way, or most qualitative holding or potential investment, it's still a potential you can consider once you've "filled" your position in other companies in the same or adjacent sectors. Despite lacking investment-grade credit and coming with a high degree of volatility, there's much to like about the company's fundamentals.
Over a century of solid history, revenues are in the billions of dollars. The company's operating segments are found in attractive its revenues from things like c hlorine, sodium hydroxide, copper alloys, epoxies, and vinyls. The company also does ammunition and rifles in the Winchester segment, basically as sort of a VAP, making it a not-uninteresting potential investment here.
Much like in the last report, Olin is still working through its massive backlog of orders. The company managed to generate approximately $1.7B of FCF during the fiscal, with key company projects and targets (Blue Water Alliance) receiving relevant regulatory approval. The company also wound down the somewhat more volatile, lower-profit epoxy resin sales and improved its overall mix/composition, and reduced utilization and participation in commercial ammunition to allow for inventories to normalize somewhat.
The pricing for Chlorine and Caustic Soda is much-improved here, though this doesn't change the overall macro view for 2023 - which is somewhat problematic.
Perhaps some of the most significant news, as it will certainly be to investors in the company, is the company once again reverting to an investment-grade credit rating during the year.
The challenging market environment continues, but the company's quarterly trends during the 2022 fiscal confirms that even during bad times, this is a company you can count on. Even with a trough, which 2023 is expected to be, insofar as mid-term troughs go, the company is expecting no less than $1.5B, and upwards of $2B of company EBITDA for the full year/fiscal of 2023.
Winding down its epoxy business somewhat also doesn't mean that the company is leaving it behind. It's just a very problematic macro not seen for many years, with a lot of capacity coming online excessive of the current demand, which is impacting producers like Olin. The segment which about 2 years back was heading into a high, is now definitely seeing a low.
Still, we can see upsides in Chlor Alkali, with 1Q23 being expected to be a bottom and the company's Blue Water Alliance growing beyond that. Chlorine & Bleach are improving its overall trends. This, if you recall, is the company's second segment, and it's a strong one.
The third business here is the Winchester business, and while fundamental demand remains, and due to the military situation, is going to increase, the company is nonetheless working through inventories at this time. Pricing is improving from a trough in 3Q22, and the Russian imports which are now at zero is a problem for the company, but it's finding a good production level for the segment and for its production.
Looking back to 2021 and 2022, the company has a very strong financial profile given the problematic current macro. It has generated no less than $2.4B in adjusted EBITDA in both years, nearing almost $5B, and the company is expecting if not quite that level, still relatively impressive EBITDA results for 2023.
The company also intends to continue repurchasing shares. This is part of Olin's strategy. As opposed to massive dividend increase, the company is focused on share repurchases as a primary method of returning cash to shareholders.
With regards to the improved credit rating, it's not as though every agency is now on board with the company's investment-grade credit. Instead, only Fitch at this time has given the company a BBB-, with others still at BB+ or equivalent, meaning junk-rating.
However, company fundamentals remain solid. The company has only small maturities until 202, and is currently at a net debt/EBITDA of 1x, with a 1.2-1.7x target - logical, given the expected EBITDA decline in the next year. The company views itself as well-positioned for continued headwinds in macro. It's also important to realize that this $1.5-$2.B target is a recession scenario.
Due to mostly positive trends across the company's segments though, as well as material improvements in the company's stability and mix, I now view Olin as far more attractive than only a few months back. I "knew" from the get-go that this company wasn't going to be able to maintain that sort of 2022A EPS in 2023, or even in 2024-2025, though there is a chance for recovery and moving higher here.
Just don't expect Olin to crack triple-digit RoRs, and you should be fine. Because this company remains a somewhat problematically-rated, low-yielding chemicals company. A sector that typically rewards investors with the best, A-rated sort of companies with yields well above 6%.
So, that continues to form the basis for the appeal of Olin here. It's not unattractive, but we need to be careful when and how we invest, as well as what we're looking for when we buy the company's shares.
Let's look at what we have going deeper into 2023 after the 2022A report has come in.
Olin's Valuation and appeal
I forecasted the now-expected 2023E guidance less than 3 months back in December. The forecast at that point was for Olin to decline around 31%. That expectation has now increased, by analysts following the company, to 36%. My own forecast is at a 35% adjusted EPS decline for this year, alongside the decline expected in company EBITDA.
This doesn't really mean that the upside we've been able to see based on normalized valuations of around 14-15x P/E is gone. They're still around 30%+ per year if the company sees full normalization.
However, will a barely-IG-rated 1.4%-yielding chemical company with an annualized EPS growth rate forecast of less than 2.5% be climbing back up in what is essentially a recessionary environment characterized by macro pressures, inflation, cost increases, and problematic overall market dynamics?
To that, I would say a firm "no". So we need to discount Olin here - and do so quite heavily.
We have one saving grace, and that is the fact that the market has a hard time deciding where to value the company in this new earnings reality here, which is significantly higher than it has been before. The more often we see the positive quarterly results we're seeing from Olin, the less ambiguous the results, forecast trends, and uncertainties get. However, we're now entering negative EPS territory - or negative growth, at the very least. This means that was once a more easy growth thesis has become far more complex.
This goes doubly when considering Olin's peers. The company trades with storied peers like Sherwin-Williams ( SHW ), Sika AG, Westlake ( WLK ), Evonik ( EVKIY ), Nissan Chemical Corp, and Mitsubishi Chemical Corp. Many of these businesses are stocks I regularly invest in, and even have very high stakes in terms of my overall portfolio. These other companies are objectively "better", meaning they are safer, come with higher yields, at decent or triple-digit upsides, and also have an excellent sales mix.
This doesn't make Olin bad - just a bit of a complex investment. It remains one I look at when I've already bought "other companies". Because once we do look at Olin from here on out, there don't seem to be many realistic scenarios where investors in the company are bound to lose money.
The shift to BBB- wasn't as much of a catalyst as I expected from Olin - but this might change once more if the company's followers change their rating. If the company hits its targets, even the somewhat lower one, I expect stability or growth here as well. It also seems unrealistic at this point, that Olin will be significantly bumping its dividend here - it's not part of the company M.O. We'll likely see very small bumps from here.
However, some significant changes in guidance since my last article. Previously the target for Olin was around $63 - there's a huge difference there now, with an average PT of $70.7, with many of the analysts shifting their lower-range target upward significantly, communicating some of the same safeties I've been talking about in my past articles. Out of 14 analysts, 11 are now at a "BUY" or equivalent, positive rating for the company, with only 1 analyst still at a "SELL" rating here.
Overall, I'd say the stance for Olin remains positive, even after the good performance we've been, but the low yield and the sub-par credit rating still make this more along the lines of a speculative than a core "BUY".
Here is my current thesis for Olin.
Thesis
- I'm sticking with my Olin thesis, which is bullish, and I stick to my PT for the company, which has been set for the past few articles. I consider the company to have performed very well.
- There are at least 2 not-unrealistic catalysts for an upside here, beginning with a bump in credit, to a bump in dividends - and even without this, there are things to like about Olin.
- I'm holding to my $65 PT, and reiterating "BUY", but remember that this company is likely to see some volatility going forward here - and that we've been as high as $64 back in February.
Remember, I'm all about:
1. Buying undervalued - even if that undervaluation is slight, and not mind-numbingly massive - companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.
2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
3. If the company doesn't go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.
Here are my criteria and how the company fulfills them (italicized). But in this case, note that the fundamentally safe is with a * due to the BB+ rating.
- This company is overall qualitative.
- This company is fundamentally safe/conservative & well-run.*
- This company pays a well-covered dividend.
- This company is currently cheap.
- This company has a realistic upside based on earnings growth or multiple expansion/reversion.
With the credit rating upgrade, I now consider 5/5 fulfilled, but I do consider the company to be somewhat more of a speculative investment at this time.
For further details see:
Olin: Remember The Upside