BUSINESS
Orion Engineered Carbons S.A., together with its subsidiaries, manufactures and sells carbon black products in Germany, the United States, South Korea, Brazil, China, South Africa, the rest of Europe, and internationally. It operates in two segments, Specialty Carbon Black and Rubber Carbon Black. The company offers post-treated specialty carbon black grades for coatings and printing applications; high purity carbon black grades for the fiber industry; and conductive carbon black grades for polymers, coatings, and battery electrodes. It also provides rubber carbon black products for applications in mechanical rubber goods under the PUREX brand, as well as in tires under the ECORAX brand name. The company was formerly known as Orion Engineered Carbons S.a r.l. and changed its name to Orion Engineered Carbons S.A. in July 2014.
INVESTMENT RATING
OEC is expected to continue to be a major Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
Orion Engineered Carbons has a current Value Trend Rating of B (Positive).
This rating combines highly consistent signals from two proprietary PTR measures of a stock’s attractiveness. Orion Engineered Carbons has a slightly positive Power Rating of 64 and a slightly positive Appreciation Score of 66, with the Positive Value Trend Rating the result.
Orion Engineered Carbons’ stock is selling well below targeted value. The current stock price of $23.23 compares to targeted value 12 months forward of $46.
This moderately high appreciation potential results in an appreciation score of 66 (only 34% of the universe has greater appreciation potential.)
Orion Engineered Carbons has a Power Rating of 64. (This slightly positive Power Rating indicates that OEC’s chances of achieving favorable investment performance over the near to intermediate term are only average.)
Factors contributing to this slightly positive Power Rating include: the Miscellaneous Chemical Products comparison group is in a strong phase currently; and recent price action has been slightly favorable. An offsetting factor is the trend in OEC’s earnings estimates has been unfavorable in recent months.
INVESTMENT PROFILE
OEC’s financial strength is average. Financial strength rating is 57.
Relative to the S&P 500 Composite, Orion Engineered Carbons SA has neutral Growth/Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that OEC is higher risk. High historical profitability is a positive for OEC. Relative weaknesses include: high stock price volatility, and high earnings variability. OEC’s valuation is moderate: low dividend yield, low P/E ratio, and moderate price/book ratio. OEC has unusually low market capitalization.
CURRENT SIGNALS
Orion Engineered Carbons’ current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; falling tax keep rate; and falling leverage.
Orion Engineered Carbons’ current technical position is very weak. The stock price is in a 1.4 month down move. The stock has declined 16.9% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.
ALERTS
Slight positive changes in fundamentals have recently occurred for Orion Engineered Carbons SA (NYSE: OEC): significant quarterly earnings acceleration occurred.
In light of this new information we are reviewing our current Overall Rating of B. This review will be completed in the next several days.
Orion Engineered Carbons SA (NYSE: OEC) has reported earnings for its fourth fiscal quarter (ending December 31) of $0.08 versus $0.20 for the same period a year ago. For the latest four quarters through December 31, E.P.S. were $1.75 versus $1.74 for the same period a year ago.
Orion Engineered Carbons SA (NYSE: OEC) stock rose modestly by 0.3% on 2/14/24. The stock closed at $23.23. This advance was accompanied by normal trading volume. Relative to the market the stock has been strong over the last nine months and has risen 2.4% during the last week.
CASH FLOW
In 2022, Orion Engineered Carbons SA experienced a slight decrease in cash of -$5.1 million (-7%). Sources of cash were slightly lower than uses. Cash generated from 2022 EBITDA totaled +$297.5 million. Non-operating uses consumed -$7.8 million (-3% of EBITDA). Cash taxes consumed -$43.3 million (-15% of EBITDA). Re-investment in the business amounted to -$394.7 million (-133% of EBITDA). On a net basis, debt investors provided +$109.7 million (+37% of EBITDA) while equity investors provided +$33.5 million (+11% of EBITDA).
OEC’s Non-operating Income, %EBITDA has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by stability for the Orion Engineered Carbons Sa Peer Group. In most years, Orion Engineered Carbons SA was in the top quartile and lower quartile. Currently, Orion Engineered Carbons SA is at the upper quartile at -3% of EBITDA (-$7.8 million).
OEC’s Cash Taxes, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by an uptrend for the Orion Engineered Carbons Sa Peer Group. (Since 2020 Cash Taxes, %EBITDA has experienced a sharp decline.) In most years, Orion Engineered Carbons SA was in the top quartile. Currently, Orion Engineered Carbons SA is above median at -15% of EBITDA (-$43.3 million).
OEC’s Business Re-investment, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Orion Engineered Carbons Sa Peer Group. (Since 2019 Business Re-investment, %EBITDA has accelerated very sharply.) In most years, Orion Engineered Carbons SA was in the second quartile and lower quartile. Currently, Orion Engineered Carbons SA is lower quartile at -133% of EBITDA (-$394.7 million).
OEC’s Debt Investors, %EBITDA has experienced a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Orion Engineered Carbons Sa Peer Group. In most years, Orion Engineered Carbons SA was in the second quartile and lower quartile. Currently, Orion Engineered Carbons SA is above median at +37% of EBITDA (+$109.7 million).
OEC’s Equity Investors, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by an opposite trend for the Orion Engineered Carbons Sa Peer Group. (Since 2019 Equity Investors, %EBITDA has experienced a very sharp recovery.) In most years, Orion Engineered Carbons SA was in the top quartile and second quartile. Currently, Orion Engineered Carbons SA is upper quartile at +11% of EBITDA (+$33.5 million).
OEC’s Change in Cash, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Orion Engineered Carbons Sa Peer Group as well. In most years, Orion Engineered Carbons SA was in the third quartile and second quartile. Currently, Orion Engineered Carbons SA is slightly below median at -2% of EBITDA (-$5.1 million).
OEC’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by stability for the Orion Engineered Carbons Sa Peer Group as well. In most years, Orion Engineered Carbons SA was in the second quartile and third quartile. Currently, Orion Engineered Carbons SA is substantially below median at +3%.
PROFITABILITY
OEC’s return on equity has improved very significantly since 2013. The current level is 22.9% versus the high of 25.5% and the low of -101.%.
The key to the story for OEC is a very small positive trend in pretax operating return significantly augmented by a very strong positive trend in non-operating factors.
The productivity of OEC’s assets declined over the full period 2013-2023: asset turnover has suffered a strong overall downtrend even as it experienced a very sharp recovery after the 2020 low.
More than offsetting this trend, however, pretax margin enjoyed a volatile overall uptrend but it experienced a very sharp decline after the 2021 high.
Non-operating factors (income taxes and financial leverage) had a very significant positive influence on return on equity.
OEC’s return on equity is below median (22.9%) for the four quarters ended September, 2023.
Operating performance (pretax return on assets) is above median (9.2%) reflecting asset turnover that is at the lower quartile (1.03X) and pretax margin at the upper quartile (9.0%).
Tax “keep” rate (income tax management) is lower quartile (65.6%) resulting in after tax return on assets that is at median.
Financial leverage (leverage) is substantially below median (3.80X).
GROWTH RATES
There are no significant differences between Orion Engineered Carbons SA’s longer term growth and growth in recent years.
Orion Engineered Carbons SA’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has fallen short of equity growth.
Annual revenue growth has been 0.1% per year. (More recently it has been 19.6%.)
Total asset growth has been 3.0% per year. (More recently it has been 7.8%.)
Annual E.P.S. growth has been 9.5% per year.
Equity growth has been 29.8% per year.
Orion Engineered Carbons SA’s consensus growth rate forecast (average of Wall Street analysts) is 12.5% — in line with the average of the historical growth measures.
Relative to the Orion Engineered Carbons Sa Peer Group, Orion Engineered Carbons SA’s historical growth measures are erratic. Equity growth (29.8%) has been upper quartile. E.P.S. growth (9.5%) has been below median. Total asset growth (3.0%) has been at the lower quartile. Revenue growth (0.1%) has been lower quartile.
Consensus growth forecast (12.5%) is at median.
PRICE HISTORY
Over the full time period, Orion Engineered Carbons SA’s stock price performance has been variable and below market. Between July, 2014 and February, 2024, Orion Engineered Carbons SA’s stock price rose +37%; relative to the market, this was a -47% loss. Significant price moves during the period: 1) March, 2020 – May, 2021: +171%; 2) December, 2019 – March, 2020: -61%; 3) August, 2018 – May, 2019: -51%; and 4) January, 2016 – August, 2018: +198%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of 6.9% is slightly above median relative to the S&P 500 Composite.
In addition to being slightly above median relative to S&P 500 Composite, current annual total return performance through January, 2024 of 6.9% is at median relative to Orion Engineered Carbons SA Peer Group.
Current 5-year total return performance of -2.6% is lower quartile relative to the S&P 500 Composite.
Through January, 2024, with lower quartile current 5-year total return of -2.6% relative to S&P 500 Composite, Orion Engineered Carbons SA’s total return performance is below median relative to Orion Engineered Carbons SA Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, OEC’s overall valuation is quite low. The highest factor, the price/equity ratio, is below median. Ratio of enterprise value/assets is below median. Price/earnings ratio is lower quartile. Ratio of enterprise value/earnings before interest and taxes is lower quartile. The lowest factor, the ratio of enterprise value/revenue, is lower quartile.
Relative to Orion Engineered Carbons SA Peer Group, OEC’s overall valuation is quite low. The highest factor, the ratio of enterprise value/assets, is at the lower quartile. Ratio of enterprise value/revenue is at the lower quartile. Ratio of enterprise value/earnings before interest and taxes is lower quartile. Price/earnings ratio is lower quartile. The lowest factor, the price/equity ratio, is lower quartile.
Orion Engineered Carbons SA has a major value gap compared to the median. For OEC to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 1.14X to 1.74X. If OEC’s ratio of enterprise value/revenue were to rise to 1.74X, its stock price would be higher by $19 to $43.
For OEC to achieve upper quartile valuation relative to the Orion Engineered Carbons SA Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 1.14X to 2.41X. If OEC’s ratio of enterprise value/revenue were to rise to 2.41X, its stock price would increase by $41 from the current level of $23.
VALUE TARGETS
OEC is expected to continue to be a major Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
Orion Engineered Carbons SA’s current Price Target of $44 represents a +91% change from the current price of $23.23.
This moderately high appreciation potential results in an appreciation score of 66 (only 34% of the universe has greater appreciation potential.)
Reinforcing this moderately high Appreciation Score of 66, the moderately high Power Rating of 64 contributes to an Value Trend Rating of B.
Orion Engineered Carbons SA’s current Price Target is $44 (+40% from the 2022 Target of $32 and +91% from the 02/14/24 price of $23.23). This dramatic rise in the Target is the result of a +35% increase in the equity base and a +4% increase in the price/equity multiple. The forecasted increase in return on equity has a slight positive impact on the price/equity multiple and the forecasted decline in cost of equity has a very slight positive impact as well. The forecasted flat growth has no impact.
PTR’s return on equity forecast is 25.8% — in line with our recent forecasts. Forecasted return on equity suffered a dramatic, variable decline between 2014 and 2022. The current forecast is significantly below the 2016 peak of 141%.
PTR’s growth forecast is 19.0% — in line with our recent forecasts. Forecasted growth enjoyed a dramatic, variable increase between 2014 and 2022. The current forecast is significantly above the 2017 low of 2%.
PTR’s cost of equity forecast is 15.6% — in line with recent levels. Forecasted cost of equity exhibited a modest, erratic increase between 2014 and 2022. The current forecast is above the 2017 low of 11.5%.
At Orion Engineered Carbons SA’s current price of $23.23, investors are placing a positive value of $8 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 19.0% per year, and a return on equity of 25.4% versus a cost of equity of 15.7%.
PTR’s 2024 Price Target of $44 is based on these forecasts and reflects an estimated value of existing assets of $21 and a value of future investments of $24.
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