Rating Update: Stock Rating A-Highest (3/31/20)-Century Aluminum Co (CENX).

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BUSINESS

Century Aluminum Company, together with its subsidiaries, produces standard-grade and value-added primary aluminum in the United States and Iceland. The company was founded in 1995 and is headquartered in Chicago, Illinois.
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INVESTMENT RATING

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Reflecting future returns on capital that are forecasted to be above the cost of capital, CENX is expected to be an important Value Builder.

Century Aluminum has a current Value Trend Rating of A (Highest Rating).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing inconsistent signals. Century Aluminum has a neutral Power Rating of 53 but a very high Appreciation Score of 95, triggering the Highest Value Trend Rating.

Century Aluminum’s stock is selling well below targeted value. The current stock price of $3.62 compares to targeted value 12 months forward of $17.
Century Aluminum’s very high appreciation potential results in an appreciation score of 95 (only 5% of the universe has greater appreciation potential.)
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Century Aluminum has a Power Rating of 53. (This neutral Power Rating indicates that CENX’s chances of enjoying favorable investment performance over the near to intermediate term are only average.)
Contributing to this neutral Power Rating: the recent trend in CENX’s earnings estimates has been extremely favorable. Offsetting factors are recent price action has been slightly unfavorable; and is currently in an unfavorable positi.

INVESTMENT PROFILE

CENX’s financial strength is poor. Financial strength rating is 2.
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Relative to the S&P 500 Composite, Century Aluminum Co has slightly more Value than Growth characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that CENX is higher risk. Relative weaknesses include: low forecasted profitability, low historical profitability, low financial strength, low historical growth, and high earnings variability. CENX’s valuation is low: low dividend yield, low P/E ratio, and low price/book ratio. CENX has unusually low market capitalization.

CURRENT SIGNALS

Century Aluminum’s current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; and falling leverage.

Century Aluminum’s current technical position is very weak. The stock price is in a 0.9 month down move. The stock has declined 33.6% from its prior high. The stock price is below its 200 day moving average which is in a downtrend. Century Aluminum’s stock price decline is extreme and the stock appears oversold.

ALERTS

Century Aluminum Co (NASDAQ: CENX). Modest positive changes in fundamentals have recently occurred. Positive developments: the consensus estimate for December, 2021 increased significantly, and the consensus estimate for December, 2020 increased significantly. Negative development: significant quarterly sales deceleration occurred.
The stock is currently rated A.
Century Aluminum Co (NASDAQ: CENX) stock closed at $0.23 on 3/31/20 after a major decline of -14.7%. However, exceptionally low trading volume at 42% of normal accompanied the decline. The stock has risen 14.2% during the last week but has been weak relative to the market over the last nine months.

CASH FLOW

In 2019, Century Aluminum experienced no change in cash of $0.00 million (). Sources of cash balanced uses. Cash generated from 2019 EBITDA totalled +$1.70 million. Non-operating sources contributed +$17.40 million (+1024% of EBITDA). Cash taxes consumed -$0.80 million (-47% of EBITDA). Re-investment in the business amounted to -$29.70 million (-1747% of EBITDA). On a net basis, debt investors supplied +$17.80 million (+1047% of EBITDA) while equity investors received -$6.40 million (-376% of EBITDA).
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Century Aluminum’s Non-operating Income, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Century Aluminum Co Peer Group. (Since 2016 Non-operating Income, %EBITDA has accelerated very sharply.) In most years, Century Aluminum was in the top quartile and second quartile. Currently, Century Aluminum is upper quartile at +1024% of EBITDA (+$17.40 million).

Century Aluminum’s Cash Taxes, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Century Aluminum Co Peer Group. In most years, Century Aluminum was in the top quartile and second quartile. Currently, Century Aluminum is lower quartile at -47% of EBITDA (-$0.80 million).

Century Aluminum’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Century Aluminum Co Peer Group. (Since 2016 Business Re-investment, %EBITDA has accelerated very sharply.) In most years, Century Aluminum was in the second quartile and lower quartile. Currently, Century Aluminum is lower quartile at -1747% of EBITDA (-$29.70 million).

Century Aluminum’s Debt Investors, %EBITDA has experienced a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Century Aluminum Co Peer Group. (Since 2016 Debt Investors, %EBITDA has accelerated very sharply.) In most years, Century Aluminum was in the third quartile and top quartile. Currently, Century Aluminum is upper quartile at +1047% of EBITDA (+$17.80 million).

Century Aluminum’s Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Century Aluminum Co Peer Group. (Since 2017 Equity Investors, %EBITDA has accelerated very sharply.) In most years, Century Aluminum was in the top quartile and lower quartile. Currently, Century Aluminum is lower quartile at -376% of EBITDA (-$6.40 million).

Century Aluminum’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Century Aluminum Co Peer Group. In most years, Century Aluminum was in the top quartile and lower quartile. Currently, Century Aluminum is slightly below median at 0% of EBITDA ( $0.00 million).
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Century Aluminum’s Cash, %Revenue has experienced a minor downtrend over the period. This downtrend was accompanied by stability for the Century Aluminum Co Peer Group. In most years, Century Aluminum was in the top quartile and second quartile. Currently, Century Aluminum is at the lower quartile at +2%.

PROFITABILITY

Century Aluminum’s return on equity has eroded very significantly since 2010 accelerating very sharply after the 2017 level.
This very significant erosion was due to very strong negative trend in pretax operating return and very small negative trend in non-operating factors.
The productivity of Century Aluminum’s assets rose over the full period 2010-2019: asset turnover has enjoyed a very strong overall uptrend.
More than offsetting this trend, however, pretax margin experienced a strong overall downtrend that accelerated very sharply from the 2017 level.
Non-operating factors (income taxes and financial leverage) had a very small negative influence on return on equity.
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Century Aluminum’s return on equity is lower quartile (-12.0%) for the four quarters ended December, 2019.
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Operating performance (pretax return on assets) is lower quartile (-5.9%) reflecting asset turnover that is above median (1.22X) and lower quartile pretax margin (-4.9%).
Tax “keep” rate (income tax management) is above median (90.6%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is above median (2.22X).

GROWTH RATES

There are no significant differences between Century Aluminum’s longer term growth and growth in recent years.
Century Aluminum’s historical income statement growth has been higher than growth in the balance sheet. Revenue growth has exceeded asset growth; earnings growth has exceeded equity growth.

Annual revenue growth has been 4.5% per year.

Total asset growth has been -2.4% per year.

Annual E.P.S. growth has been 2.8% per year.

Equity growth has been -4.9% per year.
No consensus growth rate forecast is available for Century Aluminum.
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Relative to the Century Aluminum Co Peer Group, Century Aluminum’s historical growth measures are highly erratic. Revenue growth (4.5%) has been at the upper quartile. E.P.S. growth (2.8%) has been slightly above median. Total asset growth (-2.4%) has been substantially below median. Equity growth (-4.9%) has been lower quartile.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, Century Aluminum’s stock price performance has been volatile and significantly below market. Between May, 2009 and March, 2020, Century Aluminum’s stock price fell -40%; relative to the market, this was a -79% loss. Significant price moves during the period: 1) December, 2019 – March, 2020: -52%; 2) January, 2018 – December, 2018: -67%; 3) August, 2016 – January, 2017: +145%; 4) October, 2015 – April, 2016: +144%; 5) October, 2014 – October, 2015: -88%; and 6) August, 2013 – October, 2014: +275%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -59.2% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through March, 2020 of -59.2% is below median relative to Century Aluminum Co Peer Group.

Current 5-year total return performance of -23.5% is lower quartile relative to the S&P 500 Composite.
Through March, 2020, with lower quartile current 5-year total return of -23.5% relative to S&P 500 Composite, Century Aluminum’s total return performance is substantially below median relative to Century Aluminum Co Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, CENX’s overall valuation is normal. The highest factor, the ratio of enterprise value/assets, is lower quartile. Price/equity ratio is lower quartile. Ratio of enterprise value/revenue is lower quartile. Price/earnings ratio is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable.

Relative to Century Aluminum Co Peer Group, CENX’s overall valuation is high. The highest factor, the ratio of enterprise value/assets, is below median. Price/equity ratio is below median. Ratio of enterprise value/revenue is at the lower quartile. Price/earnings ratio is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable.
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Century Aluminum has a major value gap compared to the median. For CENX to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 0.33X to 0.45X. If CENX’s ratio of enterprise value/revenue were to rise to 0.45X, its stock price would be higher by $2 to $6.
For CENX to achieve upper quartile valuation relative to the Century Aluminum Co Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 0.33X to 0.49X. If CENX’s ratio of enterprise value/revenue were to rise to 0.49X, its stock price would increase by $3 from the current level of $3.62.

VALUE TARGETS

Reflecting future returns on capital that are forecasted to be above the cost of capital, CENX is expected to be an important Value Builder.
Century Aluminum’s current Price Target of $21 represents a +492% change from the current price of $3.62.
This very high appreciation potential results in an appreciation score of 95 (only 5% of the universe has greater appreciation potential.)
With this high Appreciation Score of 95, the neutral Power Rating of 53 results in an Value Trend Rating of A.
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Century Aluminum’s current Price Target is $21 (+247% from the 2019 Target of $6 and +492% from the 03/31/20 price of $3.62). This dramatic rise in the Target is the result of a +5% increase in the equity base and a +231% increase in the price/equity multiple. The forecasted increase in growth has no impact on the price/equity multiple and the forecasted increase in cost of equity has no impact either. However, the forecasted increase in return on equity has a huge positive impact.
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PTR’s return on equity forecast is 13.2% — above our recent forecasts. Forecasted return on equity exhibited a modest, erratic increase between 2011 and 2019. The current forecast is well above the 2016 low of 4%.

PTR’s growth forecast is 4.0% — slightly above our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2011 and 2019. The current forecast is above the 2012 low of 1%.

PTR’s cost of equity forecast is 6.6% — in line with recent levels. Forecasted cost of equity erratic but little changed between 2011 and 2019. The current forecast is steady at the 2011 low of 4.8%.
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At Century Aluminum’s current price of $3.62, investors are placing a negative value of $-3 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 1.0% per year, and a return on equity of 4.0% versus a cost of equity of 4.9%.
PTR’s 2021 Price Target of $21 is based on these forecasts and reflects an estimated value of existing assets of $6 and a value of future investments of $16.

About John Lafferty 98330 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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