Avient Corporation

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Avient Corporation is a specialized and sustainable material solutions company that transforms customer challenges into opportunities, bringing new products to life for a better world by providing polymer formulations, color and additive solutions, and composite materials for a wide range of industries.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview Avient Corporation, formerly PolyOne, is a specialty materials company, with the ability to combine science and innovation expertise to meet its customers’ challenges by offering differentiated and sustainable material solutions. The company operates in two main segments, Color, Additives and Inks and Specialty Engineered Materials. It caters to industries like packaging, transportation, healthcare, and apparel. Avient seeks to build long term relationships with customers as a core strategic element.

Revenue Distribution: The majority of Avient’s revenues originate from the sale of polymer formulations, color and additive solutions, and specialty engineered materials across various industries. Geographically, the company generates a significant portion of its sales within North America, followed by Europe, Asia, and South America.
Trends in the Industry: The industry is undergoing a significant shift towards sustainability, with companies and consumers increasingly demanding eco-friendly products. This trend is creating pressure on chemical companies to lower the prices of their products and to shift more towards recycled materials, which is an expensive process, but it’s necessary for competitive advantage. Another notable trend is the growing demand for innovative solutions that can meet specific application needs.

What makes AVNT different: Avient distinguishes itself through its focus on customized material solutions, its proprietary technologies, and its emphasis on sustainability. This approach enables the company to differentiate its offerings and cultivate a diverse customer base across various industries. It also strives to be a leader in its focus on environmental responsibility, and has been working on creating more eco-friendly materials.

Competitive Landscape: The industry is fiercely competitive, with companies vying to produce materials of increasingly better performance and quality at ever decreasing cost. This high level of competition may limit a company’s capability to sustain high margins. Many of their competitors are also actively working on achieving lower operating costs with a higher product quality. Therefore, the competitive space is not stable.
Margins: The company’s operating margins in 2023 are between 10-12%, which is quite low for a specialty material solutions company. In its previous calls, the management had said it was targeting margins to expand to 16%, due to the new acquisitions and restructuring efforts. The current margins are not sustainable long term, because of the current competitive space and high input costs.
Financials: AVNT reported sales of $1.7 billion in Q3 2023, an increase of 0.8% compared to Q3 2022. Net income came in at $63.9 million compared to $63.5 million from last year same quarter, while it continues to report positive adjusted earnings per share which was $0.76. While the results aren’t great, the company’s performance was mainly held back by lower demand in its core markets of construction, packaging, and healthcare. The company’s balance sheet indicates good financial position with enough current assets compared to current liabilities. They have total debt of $2.6 billion. In 2022 they had a net loss of $282 million mainly because of write-offs related to intangible assets related to acquired companies in prior years. AVNT seems to be aggressively pursuing M&A, mostly in the high-growth areas of the industry. The free cash flow for Q3 2023 is at 69 Million. The revenue for past year was 3.457 Billion.

Legitimate Risks:

Competitive Pressure: As a diversified materials solution provider, Avient faces fierce competition from a wide range of domestic and international players. This competition could lead to price erosion and reduced margins.
Raw Material Costs: The company is highly sensitive to changes in raw material prices, particularly those for polymers and chemical compounds, as these are major components for its product manufacturing. It should implement price increases in its products to cover changes in raw material prices, but that is often easier said than done.
Acquisition Integration: Avient has been pursuing growth through acquisitions. The difficulty of combining multiple organizations, along with the need for effective leadership, are all potential risk factors and can severely impact profitability if not executed properly.
Economic Downturn: As a materials provider, Avient is tied to the economic cycle and to consumer demand. A slowdown in economic growth could significantly impact demand across its industries, as well as the availability of resources.
Supply Chain Issues: Disruptions to supply chains could lead to difficulty producing products, increasing lead times, and thus increasing costs.
Technological Disruption: The company must always be prepared for new, disruptive innovations that would create pressure on its revenue streams.
Currency Risk: As Avient operates worldwide, changes in foreign exchange rates can materially impact their results.
Customer Concentration: As the company has been focusing more on long-term contracts and relationships with customers it’s possible that a few of those customers become a very large portion of the revenue stream, creating risk if something happens to these customers.
Technological Disruption: Constant new developments by competitors can make some of AVNT’s current products non-competitive. This makes R&D a very important part of the business.
Sustainability requirements: Increased emphasis on sustainability by consumers might cause disruption to Avient’s revenues, as it takes time and effort to restructure a product to adhere to new regulations.
Management Turnover: Since the company is a mix of many acquired companies and subsidiaries, there’s an increased risk of leadership and management churn, which might be problematic for company direction.
Integration issues: Since acquisitions and integrating companies is at the core of AVNT’s strategy, a failure in execution in these areas might also cause trouble for long-term profitability.
Goodwill Impairment The company has a high goodwill on their balance sheet, which was primarily a consequence of acquisition costs. A good part of this goodwill might need to be written off in the future if the acquired company doesn’t perform well enough.

Business Resilience: Despite these risks, Avient has demonstrated some resilience as a diversified materials provider through the following:

Diversification: Serving a wide variety of industries and geographies cushions the effects of any single industry downturn or local problem.
Proprietary Technologies: Its unique technologies provide a competitive advantage in multiple markets, making it more difficult for competitors to create a similar offering.
Emphasis on Sustainability: Avient’s strong push for more eco-friendly products allows them to establish longer relationships with customers, and also protects them from regulations that are coming into effect in all countries, which also provides a more stable revenue stream.
Long-Term Relationships: Building longer-term contracts can improve visibility into future revenue streams.

Moat: 2 / 5

Avient has some characteristics of a moat, but it’s not as strong as some other players. They have a variety of factors that might give them some advantage but not a clear and defensible moat that could be exploited for long periods.

Switching costs: Some of its products offer switching costs because they are specialized for customers, which makes it less convenient for the customers to switch providers. However, this isn’t a universal theme and many products are very generic.
Intangible Assets: The company has developed several unique technologies over the years that are protected by patents or regulatory approvals that could be used to create new differentiated offerings.
Economies of scale Through acquisitions, they are trying to create and use economies of scale by merging operations and decreasing overhead, and expanding to newer markets. They are working on all of these aspects to create long-term advantages, but it’s too early to tell if they’re successful.

Understandability: 2 / 5

Avient’s business is quite complex, and it’s not very easy to clearly understand where it creates its advantage and where it’s going to make a profit.

Diversified offerings: It is a mixed portfolio of material solutions across many industries that makes it difficult to keep track of the company’s offerings, their performance, and market conditions.
Intangible assets: Their competitive advantages come from intangible assets that are hard to understand and appreciate.
Financial Complexity: The company’s financial statements contain a variety of nonoperating items, making it difficult to correctly understand what profits it’s making in its core business.
Acquisition Strategy: The reliance on acquisitions to grow, also makes valuation and forecasting more difficult.

Balance Sheet Health: 3 / 5

The company’s balance sheet is overall ok, but there are a few issues of concern:

Debt Levels: While current assets are more than current liabilities, the company has a long term debt of $2.6 billion. The company should try to pay it down over time.
Goodwill: The company has $1.7 billion of goodwill that makes 23% of its total assets. If the acquired companies don’t perform as well as expected, a good portion of this may need to be written down, and cause a loss to shareholders.
Cash Flow: The current Free Cash Flow is not that great, at $69 million for the last quarter, but management claims that FCF will improve substantially in upcoming quarters.