2023-10-10 08:00:05 ET
Summary
- Tronox Holdings' earnings and share price have been volatile due to its commodity-based nature.
- The company enjoys a competitive edge with its integrated business model and diversified customer base.
- TROX's technical indicators suggest potential for a bullish case, but the valuation is currently high, making it a risky investment.
Being a commodity-based company, the earnings and in turn the share price has been quite volatile for Tronox Holdings (TROX) the last year. In this article we are going over some of the market conditions that are currently in play and what the future performance of TROX may look like. I like the consistent growth it has had, but paying a fair price for that is essential when adding or starting a position in a company. TROX doesn't hold those qualities right now and in my opinion, makes for a compelling hold than anything else.
Operational Overview
TROX engages in the extraction and refinement of titanium ore, as well as zircon processing. The company's core offerings encompass TiONA and TiKON titanium dioxide pigment, along with specialty-grade CristalACTiV products derived from titanium dioxide and high-purity titanium compounds. These specialized products are meticulously formulated to enhance the quality of paints, plastics, and paper, catering to industries where superior product quality is paramount.
Segment Results (Investor Presentation)
TROX enjoys a substantial competitive edge thanks to its vertically integrated business model. The company produces its key raw materials in-house, enabling it to offer cost-effective services. Furthermore, TROX boasts a well-diversified customer base, minimizing the risks associated with overreliance on a single customer. This strategic advantage bolsters the company's resilience and positions it favorably in its industry.
Company Overview (Investor Presentation)
As was mentioned in the earlier parts of the article, is the fact that TROX is quite dependent on favorable commodity prices to drive growth forward. The last report from the company showed improvements in the sales volumes of titanium dioxide which has likely been a key contributor to the rising share price over the last few months. Lately, the management team has been diligently implementing a range of initiatives aimed at enhancing operational efficiency. These strategic endeavors have the potential to bolster the company's profit margins and boost its cash flow in the foreseeable future. Through these efforts, TROX is positioning itself for improved financial performance and sustainable growth.
Technicals
On the technical side of the investment case, we can see that TROX has been in a steady decline since reaching highs of $17.5 per share in early 2023. The moving average in the image above clearly indicates that as TROX either manages to go above it or below it there is quite a lot of volatility. What I think could be a catalyst in the short term for the share price is if the sales volumes continue to improve rapidly and this is displayed by TROX improving its bottom line. The share price and moving average are colliding and if it goes above I think we have found our bottom and will be heading higher, which would make for a bullish case here. But the valuation still has to be accounted for, and given the premium it displays to the sector, the market may turn sour and let it fall further until it reaches a p/e around the 14 - 16 range, which would be indicative of a near 50% drop now.
Looking at some metrics like the RSI and MACD I think the latter shows that we may be heading lower. It crossed negatively and I think this creates a risky investment right now. The long-term fundamental demand for the market should still drive growth for the business, as we saw in the last report when revenues climbed 12% YoY, but in the short term, the risks are still plenty in my opinion.
Assessing The Value
Valuation (Yahoo Finance)
Viewing the valuation of the company, I think it has become evident that TROX is quite richly valued right now. The company may be able to produce strong growth numbers, but that doesn't justify the high valuation it has. The FWD p/e every quarter is 7.45, and together it has an FWD p/e closer to 30. This is a premium of over 100% currently to the materials sector. Persistent interest rates could mute some of the earnings potentials, leading to a further contribution to the declining share price. The technicals are also quite risky and don't indicate an appealing risk/reward potential.
Risks
Fluctuations in the titanium dioxide market can impact TROX stock performance and profitability. When prices for titanium dioxide decline, it can lead to reduced profits and pricing power, potentially resulting in underperformance. Additionally, TROX's significant capital expenditures for vertical integration and sustainability efforts have constrained their free cash flow. This reliance on high CapEx may pose a short-term risk, particularly during economic downturns, where having a robust safety net becomes essential.
Titanium Price (Tradingeconomics)
In the past, TROX management prioritized maintaining substantial cash reserves to navigate through challenging economic cycles. However, due to their debt reduction efforts, the overall cash reserves have substantially decreased to just $91 million. While the company holds over $1.9 billion in liquid assets, the relatively high debt levels in comparison to cash reserves could raise concerns when seeking debt refinancing. This situation may warrant careful attention from investors and creditors alike.
Debt Repayments (Seeking Alpha)
With the debt repayments the company has made in the last few years, they have managed to very well mitigate the impact of rising interest rates to some extent. The TTM interest expenses are lower than they were in 2021 so even if the debt levels are high given that the company only has a market cap of around $2.1 billion, it still seems as if TROX is in a sound position to pay it down and not see significant impacts to the earnings. This may seem to justify a buy, but I would urge investors to take a look at the valuation and consider a hold rating instead. It still displays ample amounts of overvaluation in my opinion and finding a value proposition here is impossible right now.
Last Pointers
Earnings of TROX are heavily tied to positive market prices for titanium dioxide and so far it seems to be heading upwards, but this has created an overvalued scenario where I think TROX still exhibits too much risk to be considered a good buy. Investors should have a more cautious approach to TROX and a hold rating will be suitable here I find.
For further details see:
Tronox Holdings: Growth May Be There, But A Fair Price Isn't