Celanese Corporation

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Celanese Corporation is a global chemical and specialty materials company. It produces a wide variety of products with applications spanning numerous industries such as automotive, construction, consumer electronics, energy, textiles, paints, coatings, and paper and packaging.

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

Celanese Corporation operates through three main segments: Engineered Materials, Acetyl Chain, and Other activities (which include the Acetyl Chain’s former “Emulsion Polymers” business, cellulose derivatives, and other smaller businesses). The Engineered Materials segment primarily produces high-performance polymers with specific applications in niche industries, and Aceryl Chain is mainly engaged in producing acetic acid (VAM).

  • Engineered Materials: This segment focuses on high-performance polymers used in specialized applications. These materials are known for their durability, strength, and chemical resistance, and they’re used in industries like automotive, consumer electronics, medical technology, and more. The Engineered Materials segment is more of a specialty chemicals business and produces custom or made to specification products for specialized purposes.
  • Acetyl Chain: This segment is primarily engaged in producing acetic acid and its derivatives, primarily vinyl acetate monomer (VAM). The Acetyl Chain division provides commodities and raw materials, whereas the Engineered Materials is much more differentiated.
  • Other Activities: This segment includes the former Emulsion Polymers business, which produces emulsion polymers for coatings, adhesives, and other applications; plus cellulose derivatives used in various industries and other smaller business, for instance a contract manufacturing operation for pharmaceutical APIs.

Revenue Distribution

The company’s sales are geographically diverse with revenue streams from various regions, including Asia, North America, and Europe. By segment, in 2022 they had $4.4B revenue from Engineered Materials, $5.2B in Acetyl Chain, and $1.1B in Other Activities.

  • Growing Demand: There is a growing demand for high-performance polymers in sectors like automotive and electronics, driven by technological advancements and requirements for stronger and more lightweight materials.
  • Volatility in Feedstock Prices: The chemical industry is subject to fluctuations in feedstock prices (mainly for Acetyl Chain), which creates volatility in earnings and margins.
  • Sustainability: There is an increasing focus on sustainable and environmentally friendly chemical products, leading to companies seeking greener solutions, creating a slight push toward value-added products in commodity chemicals.
  • Global Economic Uncertainty: With global economics uncertain, demand for chemicals and materials can fluctuate alongside. Also disruptions and uncertainty from geopolitical issues or political shifts, will affect supply chains.

Competitive Landscape

Celanese operates in competitive environments, facing competition from many multinational and regional players. These competitors will vary by region and product segment.

  • Engineered Materials: Competes with a range of specialized materials companies, often with niche product offerings. They compete mostly on product differentiation and customer relationships.
  • Acetyl Chain: Competes primarily with other large chemical companies which have production capabilities, especially for basic raw materials like VAM. This segment is more of a commodity business so competition is mainly on price and cost of production.
  • Other Activities: Competes with specialized smaller chemical companies or other service companies in their respective areas of focus.

What Makes Celanese Different?

Celanese stands out due to its broad range of products with high degree of technical specialization and a focus on innovation and application. The company’s long-standing customer relationships give them an advantage. The company is moving towards a more specialized and high margin business by focusing on the Engineered Materials division. In recent years, their Acetyl Chain business has become more of a commodity business, in which they are dependent on pricing of raw materials. The company is a large scale chemical manufacturer, and they have facilities worldwide with a large logistics network, giving them a good size advantage. This also allows the company to gain insight in local markets, and create tailored products for different customers.

Financial Analysis

Profitability:

  • The company’s profitability is heavily influenced by fluctuations in commodity prices and the economic cycle. The operating margins vary wildly year to year because of this.
  • In recent years, their profits are declining. For example, in the latest 3 months, they had a net loss of $361 million.
  • ROIC is trending lower, and is now around the 10% mark, after staying consistently high in the past.
  • The company is trying to focus more on the higher margin Engineered Materials business and reduce exposure to volatility from their commodity division.

Revenue:

  • The latest annual revenues for the company are $10.9 billion, which is about 10% more than the previous year.
  • They have had a good track record of growing revenue, but with fluctuations caused by macro environments. For example, in the recent quarter, their revenue growth has decreased.
  • While some businesses, particularly Acetyl Chain, are susceptible to macroeconomic trends and price fluctuations, others such as Engineered Materials are growing steadily.

Balance Sheet Health:

  • They are highly leveraged with about $11.3 billion in debt and equivalents and $6.8 billion in equity.
  • They have a history of acquisitions and acquisitions increase long term liabilities and debt. They seem to value acquisitions in increasing growth for the company which is what is most concerning when they are highly leveraged.
  • The debt seems manageable at the moment, however, they have faced negative earnings in recent quarters and the cost of their debt is rising as rates increase which can have an adverse effect on the balance sheet.
  • Their long-term debt is significantly more than their yearly operating income, which should also be noted.

Moat: 2/5

I would assign Celanese a narrow moat rating at 2/5, with the following justifications:

  • Intangible Assets (Weak): Celanese has a moderately strong reputation in its core specialty markets. Some of their brands do have some customer recognition. However, they are not particularly known for being the highest-quality or for creating premium products which customers would choose even though other options may be readily available at a lower cost. Overall, their brand moat is weak. They also lack significant patent protection for most of their commodities that are produced in Acetyl Chain. While they have some patents in engineered materials, these don’t necessarily create high value for the company compared to its competitors.
  • Switching Costs (Moderate): There are moderate switching costs in some of the specialty materials segments of their business, where customers have to form specific relationships for unique products. This does not apply to their commodity chemical production because those are available from multiple providers.
  • Network Economics (Weak): The company does not have network effects in general since its customers are mostly industrial and other business customers. They do not create large network effects in either division.
  • Cost Advantages (Narrow): The company has a small cost advantage in certain regions for certain raw materials. For example, they buy cheaper raw materials when the prices are low, and are more established in the industry in terms of having established relationships, which can reduce production costs. These are also not particularly significant when analyzed in depth.
  • Overall: The only real source of a moat that Celanese has, is its access to supply and knowledge base. They are well established with good business relationships, but their economic moat is not very strong compared to their competitors as there is not a lot of product differentiation for the bulk of their portfolio, and switching costs can be low. They face a number of competitors in their divisions, and are susceptible to changes in the economic climate as commodity prices may change.

Risks that Could Harm the Moat and Resilience:

  • Economic Downturn: A global economic downturn could hurt the demand for chemicals and specialty materials, negatively impacting revenue and profitability.
  • Raw Material Prices: Fluctuations in feedstock costs could compress margins, especially in the Acetyl Chain segment, which is dependent on commodity raw materials.
  • Technological Disruption: Competitors may develop newer or better methods, or products, that would decrease the need for Celanese’s products, especially with the focus on new sustainable materials and production.
  • Customer Concentration: The company is reliant on a few large customers, which creates concentration risk and a loss of bargaining power for them.
  • Acquisition Integration: The company has a history of acquisitions. Should the companies they acquire be more costly than initially predicted or not perform well, the financial position of the company can be negatively affected. The company will not be able to use the acquisition to full potential if there is lack of management skills or inability to integrate, either due to financial restraints, culture, or complexity.
  • Increased Competition: Over the long-term, competitors may develop similar supply chains, capabilities, or market access which increases competition.
  • Debt and Credit Rating: The company carries substantial debt on its balance sheet and a downgrade in the company’s credit rating could lead to higher interest payments and financial distress.
  • Changing regulations: Changes in government regulations, environmental standards, and trade restrictions could also affect the company’s operations.
  • Geopolitical risk: A large part of their revenue comes from international operations. Geopolitical risks such as trade wars, sanctions, and regional unrest could hurt the stability of the company.

Understandability: 2/5

The company has complex financial statements and operations and requires a good understanding of the chemical and materials industry to thoroughly understand the company. The company’s structure and organization is not always easy to follow and financial metrics are not straight-forward to analyze. The number of divisions, especially, add complexity to the analysis. Moreover, their global sales and exposure to various economic factors add additional complexity. Their acquisitions and joint ventures also contribute to complexity and make analysis hard without specialized knowledge. Also the sheer number of materials, and their associated jargon, can make the company difficult to understand. For example, many of the material types, like “Acetate Tow” or “VAM,” are not readily familiar to anyone outside the industry, requiring more specialized research to understand what they are used for and their implications on revenue.

Balance Sheet Health: 3/5

The company has a highly leveraged balance sheet. They have substantial amounts of debt, which would present a large issue if their operating earnings drop or interest rates rise. Also the goodwill on their balance sheet, which is an intangible asset, constitutes a substantial part of their total assets, which should be noted. The company’s interest coverage ratio is also low and leaves them susceptible to rate changes and downturns in profits. They have a good level of current assets to cover their liabilities and a positive free cash flow generation, but overall the large debt balance places their balance sheet at just about a healthy level of 3.