The Chemours Company Is Undervalued (NYSE:CC)

Via SeekingAlpha.com

Investment Thesis:

The Chemours Company (NYSE: CC) saw a price drop from $58.08 in October 24, 2017 to a current price of $15.75, which represents about a 70% price decline. That leaves the stock, which pays an annual $1 dividend, with a very respectable dividend yield of 6.35%.

6.35% is a good yield on cost to begin with in any long term investment, and even without any short-to-medium term increase, it would give us a decent return that, if reinvested, would beat inflation by a good amount in the long run.

In this article, I am not only going to show the fact that the dividend is safe, but also the stability of the company and the reduction in outstanding shares that past buybacks have taken place in the last 5 years.

Brief Overview of the Company:

Image Source: YCharts

The Chemours Company is a chemical company based in the United States, born in July 2015 as a result of a spin-off from DuPont (NYSE: DD). The company is composed of brands and products well-known by industries, such as Opteon refrigerants, Ti-Pure, which is the world’s biggest producer of titanium dioxide products, Nafion, a division that produces membranes, dispersions and resins, essential for multiple industries, Viton fluoroelastomers, which produces an essential fluorocarbon-based synthetic rubber of which entire industries such as the automotive, airspace, chemical processing, oil and gas industries depend. It also produces Krytox, an oil and lubricant manufacturer, and Freon, another refrigerant division.

The company owns 30 major manufacturing facilities around the world. All the products manufactured represent wide moats that create long term relationships between The Chemours Company and big manufacturers of other products. They also have few subsidiaries, such as Southern Ionics Minerals or First Chemical Texas, among others.

Dividend safety:

The Chemours Company Free Cash Flow and Dividends Paid

Image Source: Ycharts

As we can see in the chart above, the resources that the company uses to pay the current dividend of $1 are well covered by the free cash flow. Given the company’s dependence on other companies that use its products, the coronavirus crisis is likely to hurt their earnings in the short term. It means that the company is going to live a hard time trying to pay the dividend to shareholders from their free cash flow. That’s why we need to make sure they still have enough resources in that case.

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With a $1 annual dividend and 164.22M shares outstanding, the company has an expense of $164.22M in dividends every year. In the scenario of declining free cash flows, we would need to see a 42.25% decrease to get to a 100% free cash flow dividend payout ratio.

The Chemours Company total current assetsImage Source: 10-Q Filing

If we look carefully at the picture above, we can see that the company has $714M of cash and cash equivalents. That amount of cash is enough to pay the current dividend of $1 per share for about 4 years. 4 years is a lot of time, but anyways the company would still be generating free cash flow meanwhile, so the dividend doesn’t have to be covered purely by cash on hands. That’s why the dividend could be paid for many years, while the economy recovers from the current COVID-19 crisis and the demand stabilizes.

A good track record of Share Buybacks:

The Chemours Company Outstanding Shares

Image source: Ycharts.

In July 2015, there were 181M outstanding shares, while the current outstanding shares stand at 164.22M. It means that shareholders owning the stock during this period, today have a 10.21% bigger stake of the company that they owned at the beginning of the period.

Keeping this pace, the company would offer an approximate 2% annual return that could be added to the dividend, offering a total 8.35% return just from the yield on cost and buyback returns.

Key Risks to Consider:

The Chemours Company is a company that relies on other companies and the health status of various industries that use their products for their manufacturing. The coronavirus crisis is likely to significantly hurt many industries and will affect the company’s performance in the short term, until the crisis is overcome. A significant decrease in its free cash flow would put the dividend at risk. However, the company has resources to continue paying the dividend thanks to its cash and cash equivalents.

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In the case of a tight free cash flow dividend payout ratio, the company could decide to cut or suspend temporarily the dividend in order to preserve a clean and healthy balance sheet. Although it would hurt shareholder returns in the short term, dividend increases deserve to be waited in exchange for a stable 6.35% yield on cost.

Declines have been decreasing since Q2 ’18, and this is the risk new investors should be willing to take in exchange for a huge discount in the share price. The company has been taking steps to improve their results. In March 2020, Chemours inaugurated a new innovation facility with the aim of finding new uses for its products, with over 300 researchers working in more than 130 laboratories. This shows the company’s determination to invest in R&D to turn things around.

Given the short period of time that has passed since the spin-off from DuPont, not enough information is available regarding long term fundamental trends. We also have to be cautious regarding the company’s debt, as Chemours holds 4.16B in long term debt, generating an annual expense of $211.00M, leaving the company with a 6.42 debt to equity ratio, which is too high. In order to ensure the company’s long term health, we really want to see that debt being paid down.

Image Source: Ycharts

Q1 2020 Results:

The Q1 ’20 results saw a -5.16% decrease in revenue YoY from $1.38 billion in Q1 ’19 to $1.30 billion, while adjusted EBITDA declined 1.9% YoY to $257M, although the EBITDA margin improved slightly from 19% last year vs. 20% this year. Definitely, it hasn’t been a good quarter for Chemours. In fact, it has been seeing revenue declines since Q2 ’18, from $1.82B that quarter to 1.38B in Q1 ’20. This fact explains the drop in price that the stock has suffered.

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On the other hand, free cash flow was $-62M, an improvement of 64.97% YoY from $-177B the same quarter last year. The number is negative in part because the highest capital expenditure takes place usually during the first quarter of the year. In fact, Q4 ’19 free cash flow ended up with $304M (a 189% increase YoY from $105M in Q4 ’18), that’s why we used free cash flow (NYSE:TTM) to calculate the dividend safety.

Conclusion

The Chemours Company is a company that manufactures products and materials that are essential for the operation of many industries, which makes the stock a buy and hold for the long term investment. Since Q2 ’18, revenues have been decreasing, and this explains the huge stock price decline of about 70% we see today.

A 70% depreciation in its share price has left a healthy 6.35% dividend that has a huge increase potential in the long term. Even in the scenario that the company sees its cash flows decrease to levels where it cannot cover its dividend, it has the resources to continue paying the dividend for another 4 years. Given my analysis, I come to the conclusion that this stock is undervalued.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.