- VHI posted strong Q2 2022 results, beating the market EPS and revenue estimates.
- The company saw 20% jump in revenue and a 30% increase in net income compared to Q2 2021.
- I assign a buy rating for the company after considering attractive valuation and strong quarterly results.
Investment Thesis
Valhi, Inc. ( VHI ) is a specialty chemical company headquartered in Dallas, Texas. This thesis is primarily based on the Q2 2022 results of the company and its future growth prospects. In this thesis, I will also be analyzing the risks faced by the company and its valuation. I believe VHI is a growth company and has performed significantly well in recent quarters. VHI is undervalued at current price levels. I assign a buy rating for VHI after considering these factors.
Company Overview
VHI has classified its operations into 3 major segments; Chemicals, Components Products, and Real Estate Management and Development. The majority of the revenue is contributed by the Chemical segment, with over 90% share in the total revenue, followed by the Components Products at 6.5% and Real Estate Management and Development at 3.5%. VHI sells products in over 100 countries and has around 4000 customers worldwide. The company earns the majority of the revenue from the European region at 46%, followed by North America at 37% and the Asia Pacific at 10%. The primary product sold by the company under the Chemical segment is value-added titanium dioxide pigments, or TiO2, a white inorganic pigment used in a variety of products for its durability. The company sells TiO2 through its subsidiary Kronos. It is amongst the top 5 TiO2 suppliers in the world.
Strong Q2 2022 Results
VHI posted stellar second quarter results, beating the market EPS and revenue estimates by a significant 10% and 4.5%, respectively. The company saw improvement across segments with increased gross and profit margins. As per my analysis, the primary reason behind the strong performance is the sustained strong demand coupled with the increased average sales price of TiO2 that VHI has experienced over the past six months. I believe this momentum is likely to continue for the rest of FY22 and the profit margins will improve significantly going ahead, owing to the declining inflationary pressure.
VHI reported net sales of $634.6 million, a 20% jump from $525.3 in the same quarter last year. As per my analysis, the increase in the selling price of TiO2 was the main contributing factor to this increase. The other income saw a significant 93% increase from $7.8 million in Q2 2021 to $15 million. As per my research, the primary factor behind this increase was the sale of land not used in the operations of the company. The total revenue stood at $649.6 million, a 22% increase from $533.1 million in the corresponding quarter last year.
On the other hand, the total cost of sales was reported at $487.9 million against $400.7 million in the same quarter the previous year, an increase of 21.87%. I believe inflation played a big role in this increase, resulting in the high cost of procuring raw materials. Selling, general and administrative expenses saw a 6% increase from $78.5 million to $79 million. The total cost and expenses stood at $593.2 million, a 20.5% increase from Q2 2021. The increased cost of raw materials and energy resulted in this increase. The company reported net income attributable to VHI shareholders at $28 million, a 30% increase from $21.4 in the corresponding quarter previous year. The diluted EPS was reported at $0.98 against $0.75 in Q2 2021.
Overall, the company performed exceedingly well. If we take into consideration the $29 million in the lost net sales value that the company faced due to foreign currency price fluctuation, then the results reflect to be even more impressive. The euro is the primary foreign currency that VHI earns in the European countries, and the euro is recovering from its lows. This reflects the positive future prospects for the company. I believe the total expenses will show a significant decline in the coming quarters as we are experiencing ease in the overall inflation in the U.S. economy. This makes me even more optimistic about the company's performance in the future quarters. The company has not provided any future guidance, but I believe the company can achieve FY22 EPS in the range of $4.92-$4.95.
Key Risk Factor
Dependency and Cyclical Nature of TiO2: Sales and profitability for the company's chemicals business rely heavily on the TiO2 market. TiO2 sales accounted for 92% of the chemicals segment's sales in 2021. Historically, demand for these items has been correlated with native and international gross domestic product and disposable incomes, both of which can be adversely impacted by weak economic circumstances. Such occurrences can probably result in less demand for the company's products, negatively affecting operating results and financial situation. Prices in the TiO2 market are cyclical over the long run, and changes in international economic conditions can greatly impact the profitability and cash flow from operations of the chemicals segment. Many of the chemicals segment's products have historically gone through rising and falling demand cycles. One of the key elements influencing the degree of profitability for the chemicals section is the comparative shifts in selling prices for the sector's products. Selling prices and profit margins in the chemicals section typically rise during times of increasing demand, while they usually fall during times of falling demand. Pricing may also impact customer inventory levels since consumers occasionally speed up or postpone TiO2 orders depending on whether they expect price hikes or decreases.
Valuation and Factor Grades
According to the quant ranking of Seeking Alpha, the company has 9th rank in industry and 82nd in the sector, which tells that the company is well positioned in the overall industry and sector. According to the factor grades, the company has a B in growth, a B in profitability, and A+ in momentum. The company has a B grade in valuation, and I believe B is the correct grade to justify a current valuation of the company.
The company currently trades at $42.25 with a market capitalization of $1.19 billion. The company currently trades at a P/E multiple of 9.47x against the industry average of 12.69x. After considering the stable demand for the company product and the half-year financials of the company, I estimate the full-year EPS to be $4.92, which gives the leading PE multiple of 8.5x. I think due to the strong momentum, the company can trade at a higher P/E multiple in the future. I think the company might trade at a P/E multiple of 11x, which gives the target price of $54.12, representing the 28% upside from the current share price.
Conclusion
The company is experiencing steady demand, and the benefits of the same are reflected in recent quarterly results. The company's sales and profitability for the chemicals business are heavily dependent on the TiO2 market, but the current market scenario is in favor of the company, which makes risk-reward favorable. The company is currently trading at an inexpensive leading P/E multiple of 8.5x with a full-year EPS estimate of $4.92. After considering the 28% upside from current levels, I assign a buy rating for VHI.
For further details see:
Valhi: Trading At An Attractive Valuation With Strong Growth Prospects