Rating Update: Stock Rating D-Negative (9/9/19)-Ashland Global Holdings Inc (ASH).

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BUSINESS

Ashland Global Holdings Inc. provides specialty chemical solutions worldwide. Its Specialty Ingredients segment provides products, technologies, and resources for solving formulation and product-performance challenges. It offers solutions using natural, synthetic, and semisynthetic polymers derived from plant and seed extract, cellulose ethers, vinyl pyrrolidones, and acrylic polymers, as well as polyester and polyurethane-based adhesives. This segment offers its solutions for pharmaceutical companies; makers of personal care products, food, and beverages; manufacturers of paint, coatings, and construction materials; makers of nutraceuticals and supplements; packaging and converting markets; and oilfield service companies.
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INVESTMENT RATING

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Reflecting future returns on capital that are forecasted to exceed the cost of capital, ASH is expected to continue to be a modest Value Builder.

Ashland Glob Hldgs has a current Value Trend Rating of D (Negative).
The Value Trend Rating reflects highly consistent signals from PTR’s two proprietary measures of a stock’s attractiveness. Ashland Glob Hldgs has a slightly negative Appreciation Score of 40 and a slightly negative Power Rating of 36, leading to the Negative Value Trend Rating.

Ashland Glob Hldgs’ stock is selling at targeted value. The current stock price of $74.56 compares to targeted value 12 months forward of $75.
This moderately low appreciation potential results in an appreciation score of 40 (60% of the universe has greater appreciation potential.)
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Ashland Glob Hldgs has a Power Rating of 36. (This slightly negative Power Rating indicates that ASH’s chances of enjoying attractive investment performance over the near to intermediate term are only average.)
Factors contributing to this slightly negative Power Rating include: ASH’s earnings estimates have fallen very significantly in recent months; and recent price action has been neutral. An offsetting factor is is currently in a modestly favorable positi.

INVESTMENT PROFILE

ASH’s financial strength is average. Financial strength rating is 45.
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Relative to the S&P 500 Composite, Ashland Global Holdings Inc has significant Value characteristics; its appeal is likely to be to Income-oriented investors; the perception is that ASH is higher risk. All factors are relative weaknesses. Relative weaknesses for ASH include: low forecasted profitability, low historical profitability, low financial strength, high stock price volatility, low historical growth, and high earnings variability. ASH’s valuation is moderate: moderate dividend yield, high P/E ratio, and low price/book ratio. ASH has unusually low market capitalization.

CURRENT SIGNALS

Ashland Glob Hldgs’ current operations are eroding. Return on equity is falling, reflecting: falling asset utilization; declining pretax margin; falling tax keep rate; and falling leverage.

Ashland Glob Hldgs’ current technical position is very weak. The stock price is in a 3.0 month down move. The stock has declined 17.8% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.

ALERTS

The stock is currently rated D.
Ashland Global Holdings Inc (NYSE: ASH) stock closed at $3.87 on 9/9/19 after a major increase of 42.8%. However, below average trading volume at 70% of normal accompanied the advance. The stock has risen 2.8% during the last week and has performed in line with the market over the last nine months.

CASH FLOW

In 2018, Ashland Glob Hldgs experienced a very significant reduction in cash of -$272.0 million (-46%). Sources of cash were much lower than uses. Cash generated from 2018 EBITDA totalled +$627.0 million. Non-operating uses consumed -$74.0 million (-12% of EBITDA). Cash taxes consumed -$105.0 million (-17% of EBITDA). Re-investment in the business amounted to -$185.0 million (-30% of EBITDA). On a net basis, debt investors received -$430.0 million (-69% of EBITDA) while equity investors removed -$105.0 million (-17% of EBITDA).
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Ashland Glob Hldgs’ Non-operating Income, %EBITDA has suffered a strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Ashland Global Holdings Inc Peer Group. In most years, Ashland Glob Hldgs was in the third quartile and lower quartile. Currently, Ashland Glob Hldgs is below median at -12% of EBITDA (-$74.0 million).

Ashland Glob Hldgs’ Cash Taxes, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Ashland Global Holdings Inc Peer Group. In most years, Ashland Glob Hldgs was in the top quartile and lower quartile. Currently, Ashland Glob Hldgs is lower quartile at -17% of EBITDA (-$105.0 million).

Ashland Glob Hldgs’ Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Ashland Global Holdings Inc Peer Group. In most years, Ashland Glob Hldgs was in the second quartile and lower quartile. Currently, Ashland Glob Hldgs is above median at -30% of EBITDA (-$185.0 million).

Ashland Glob Hldgs’ Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Ashland Global Holdings Inc Peer Group. In most years, Ashland Glob Hldgs was in the third quartile and top quartile. Currently, Ashland Glob Hldgs is below median at -69% of EBITDA (-$430.0 million).

Ashland Glob Hldgs’ Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Ashland Global Holdings Inc Peer Group. (Since 2016 Equity Investors, %EBITDA has accelerated very sharply.) In most years, Ashland Glob Hldgs was in the third quartile and top quartile. Currently, Ashland Glob Hldgs is substantially below median at -17% of EBITDA (-$105.0 million).

Ashland Glob Hldgs’ Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Ashland Global Holdings Inc Peer Group. In most years, Ashland Glob Hldgs was in the third quartile and top quartile. Currently, Ashland Glob Hldgs is substantially below median at -43% of EBITDA (-$272.0 million).
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Ashland Glob Hldgs’ Cash, %Revenue has exhibited a minor overall uptrend over the period. This improvement was accompanied by an opposite trend for the Ashland Global Holdings Inc Peer Group. (Since 2016 Cash, %Revenue has experienced a very sharp decline.) In most years, Ashland Glob Hldgs was in the second quartile and lower quartile. Currently, Ashland Glob Hldgs is at the lower quartile at +9%.

PROFITABILITY

ASH’s return on equity has eroded very significantly since 2009.
A major analytical focus for ASH is a minor positive trend in pretax operating return a significantly offset by very strong negative trend in non-operating factors.
The productivity of ASH’s assets declined over the full period 2009-2019: asset turnover has suffered a very strong overall downtrend.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
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ASH’s return on equity is below median (0.2%) for the four quarters ended June, 2019.
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Operating performance (pretax return on assets) is below median (0.4%) reflecting asset turnover that is lower quartile (0.36X) and below median pretax margin (1.1%).
Tax “keep” rate (income tax management) is lower quartile (23.3%) resulting in after tax return on assets that is unavailable.
Financial leverage (leverage) is at median (2.46X).

GROWTH RATES

There are no significant differences between Ashland Global Holdings’ longer term growth and growth in recent years.
Ashland Global Holdings’ historical income statement growth and balance sheet growth have diverged. Revenue growth has fallen short of asset growth; earnings growth has paralleled equity growth.

Annual revenue growth has been -7.9% per year.

Total asset growth has been -0.2% per year.

Annual E.P.S. growth has been -3.9% per year.

Equity growth has been 0.8% per year.

Ashland Global Holdings’ consensus growth rate forecast (average of Wall Street analysts) is 8.5% — substantially above the average of the historical growth measures.
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Relative to the Ashland Global Holdings Inc Peer Group, Ashland Glob Hldgs’ historical growth measures are erratic. E.P.S. growth (-3.9%) has been slightly above median. Total asset growth (-0.2%) has been substantially below median. Equity growth (0.8%) has been at the lower quartile. Revenue growth (-7.9%) has been lower quartile.

Consensus growth forecast (8.5%) is substantially below median.
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PRICE HISTORY

Over the full time period, Ashland Global Holdings’ stock price performance has been variable and exceptional. Between November, 2008 and September, 2019, Ashland Global Holdings’ stock price rose +681%; relative to the market, this was a +135% gain. Significant price moves during the period: 1) September, 2011 – February, 2015: +189%; and 2) February, 2009 – September, 2009: +631%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -2.0% is below median relative to the S&P 500 Composite.
In addition to being below median relative to S&P 500 Composite, current annual total return performance through July, 2019 of -2.0% is slightly above median relative to Ashland Global Holdings Inc Peer Group.

Current 5-year total return performance of 9.6% is below median relative to the S&P 500 Composite.
Through July, 2019, with below median current 5-year total return of 9.6% relative to S&P 500 Composite, Ashland Glob Hldgs’ total return performance is at the upper quartile relative to Ashland Global Holdings Inc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, ASH’s overall valuation is normal. The highest factor, the price/earnings ratio, is upper quartile. Ratio of enterprise value/earnings before interest and taxes is above median. Ratio of enterprise value/revenue is below median. Ratio of enterprise value/assets is at the lower quartile. The lowest factor, the price/equity ratio, is lower quartile.

Relative to Ashland Global Holdings Inc Peer Group, ASH’s overall valuation is quite high. The highest factor, the price/earnings ratio, is upper quartile. Ratio of enterprise value/revenue is at the upper quartile. Ratio of enterprise value/assets is at the upper quartile. Price/equity ratio is above median. The lowest factor, the ratio of enterprise value/earnings before interest and taxes, is slightly above median.
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Ashland Glob Hldgs has a major value gap compared to the median valuation. For ASH to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 2.45X to 1.31X. If ASH’s ratio of enterprise value/revenue were to fall to 1.31X, its stock price would be lower by $-54 to $21.
For ASH to fall to lower quartile valuation relative to the Ashland Global Holdings Inc Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 2.45X to 1.06X. If ASH’s ratio of enterprise value/revenue were to fall to 1.06X, its stock price would decline by $-65 from the current level of $75.

VALUE TARGETS

Reflecting future returns on capital that are forecasted to exceed the cost of capital, ASH is expected to continue to be a modest Value Builder.
Ashland Global Holdings’ current Price Target of $76 is little changed from the current price of $74.56.
This moderately low appreciation potential results in an appreciation score of 40 (60% of the universe has greater appreciation potential.)
Reinforcing this moderately low Appreciation Score of 40, the moderately low Power Rating of 36 contributes to an Value Trend Rating of D.
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Ashland Global Holdings’ current Price Target is $76 (+18% from the 2018 Target of $65 and +2% from the 09/09/19 price of $74.56). This slight rise in the Target is the result of a -6% decrease in the equity base and a +25% increase in the price/equity multiple. The forecasted increase in return on equity has a large positive impact on the price/equity multiple and the forecasted decline in growth has a large positive impact as well. Partially offsetting these Drivers, the forecasted increase in cost of equity has a slight negative impact.
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PTR’s return on equity forecast is 8.4% — in line with our recent forecasts. Forecasted return on equity suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is well below the 2015 peak of 16%.

PTR’s growth forecast is 3.0% — slightly above our recent forecasts. Forecasted growth suffered a dramatic, variable decline between 2010 and 2018. The current forecast is steady at the 2012 peak of 3%.

PTR’s cost of equity forecast is 6.5% — in line with recent levels. Forecasted cost of equity exhibited a modest, erratic decline between 2010 and 2018. The current forecast is steady at the 2015 peak of 7.8%.
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At Ashland Global Holdings’ current price of $74.56, investors are placing a positive value of $4 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of -2.0% per year, and a return on equity of 6.9% versus a cost of equity of 5.8%.
PTR’s 2020 Price Target of $76 is based on these forecasts and reflects an estimated value of existing assets of $69 and a value of future investments of $7.

About John Lafferty 54938 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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