Investor Essentials Daily

Rating agencies don’t recognize the potential of this chemical company

Orion Engineered Carbons (OEC)
November 29, 2022

We have been talking about themes like the supply chain supercycle, the shale renaissance, and the at-home revolution for a long time.

For businesses, it’s important to be in industries that can benefit from these megatrends, but it is also critical to be the suppliers of these beneficiaries and one of the crucial suppliers is Orion Engineered Carbons S.A. (OEC).

Yet, the rating agencies do not recognize their potential and consider it a high-yield company.

Let’s have a look at the company through the Uniform Accounting lens to see if it deserves to be rated with a high chance of default.

We can use Uniform Accounting to put the company’s real profitability up against its obligations and decide for ourselves the true risk of this business.

Also below, a detailed Uniform Accounting tearsheet of the company.

Investor Essentials Daily:
Wednesday Credit Insights
Powered by Valens Research

There are significant macro trends upcoming that are based on improving technology, changing consumer behavior, and much-needed infrastructure developments.

These next big themes are the shale renaissance, the at-home revolution, and the supply chain supercycle.

Here at Valens, we have been underlining the importance of these themes to the US economy and to investors as well.

However, most investors are missing that not only the companies and sectors with huge investments from these themes will benefit from it.

There are other beneficiaries who will take advantage of supplying essential products or services for these companies and sectors.

One great example is Orion Engineered Carbons S.A. (OEC).

The company manufactures and sells carbon black products in the United States, and internationally.

Its premium carbon black products have a variety of end-uses, including energy distribution, automotive production, construction, manufacturing of wires and cables, as well as certain food, consumer, and medical applications.

Its products are essential supplies for the industries that will benefit from these megatrends.

Yet, the credit rating agencies do not seem to understand the critical positioning of the company and rate it like it has a very high chance of bankruptcy.

Giving it a BB rating and implying around a 10% probability of default is too much risk considered for Orion Engineered Carbons.

We can figure out if there is a real risk for this company by leveraging the Credit Cash Flow Prime (“CCFP”) to understand the company’s obligations matched against its cash and cash flows.

In the chart below, the stacked bars represent the firm’s obligations each year for the next five years. These obligations are then compared to the firm’s cash flow (blue line) as well as the cash on hand available at the beginning of each period (blue dots) and available cash and undrawn revolver (blue triangles).

The CCFP chart shows that Orion Engineered Carbons’ cash flows are much more than enough to cover its obligations going forward.

The CCFP chart shows no risk at all for Orion Engineered Carbons since the company’s gross cash earnings alone are above its obligations going forward except in 2028.

The debt headwall in 2028 may look scary but the company has sufficient cash and cash flow available, and it also has the ability to refinance until maturity.

Considering these factors, and the company’s essential positioning, a high yield rating that implies a 10% chance of default is an overly pessimistic credit risk assessment for the company.

On the other hand, we take into account all these factors and give an IG3+ rating to the company, which implies approximately a 1% chance of default.

It is our goal to bring forward the real creditworthiness of companies, built on the back of better Uniform Accounting.

To see Credit Cash Flow Prime ratings for thousands of companies, click here to learn more about the various subscription options now available for the full Valens Database.

SUMMARY and Orion Engineered Carbons Tearsheet

As the Uniform Accounting tearsheet for Orion Engineered Carbons (OEC:USA) highlights, the Uniform P/E trades at 15.2x, which is below the global corporate average of 18.4x and its historical P/E of 29.7x.

Low P/Es require low EPS growth to sustain them. In the case of Orion Engineered Carbons, the company has recently shown a 1004% Uniform EPS growth.

Wall Street analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.

We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, Orion Engineered Carbons’ Wall Street analyst-driven forecast is for a 51% and 27% EPS growth in 2022 and 2023, respectively.

Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Orion Engineered Carbons’ $18 stock price. These are often referred to as market embedded expectations.

Furthermore, the company’s earning power in 2021 was above the long-run corporate average. Moreover, cash flows and cash on hand are 2x its total obligations—including debt maturities and capex maintenance. The company also has an intrinsic credit risk that is 180bps above the risk-free rate.

Overall, this signals a moderate credit risk and a low dividend risk.

Lastly, Orion Engineered Carbons’ Uniform earnings growth is above its peer averages and is trading in line with its average peer valuations.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

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