Looking for Laggards 5: Orion Engineered Carbons S.A. (OEC) Mar-to-May Ins Buy, weekly MACD up. Good valuation.

May 27, 2020

Orion Engineered Carbons (OEC) is a Luxembourg-based global producer of specialty and rubber carbon black. Specialty carbon black is used for coatings, ink, plastics, and a variety of other products. Rubber black, a commoditized product, is used in high-performance tires.

 

Insiders having been buying from March to May 2020. Weekly MACD turns up too. This suggests a bottom has been put in place.

 

Please refer to their recent May 2020 investor presentation here: https://s24.q4cdn.com/424292476/files/doc_presentation/2020/05/OEC-INVESTOR-PRESENTATION-May-2020.pdf

 

THE BUSINESS

 

They have 25% business share by volume in specialty carbon black.

 

Their customers are in US, Europe and Asia.

 

 

The big impact of the COVID19 impact on their clients sharply slowing production down is between ~-34% to -64%.

 

 

 

WHAT ANALYSTS THINK:

 

Taking into account these bearish sentiment: Analyst estimates for their earnings are as follows:

 

 

This implies that after a weak 2020, analysts think there will be a growth to an EPS of 1.85 by 2025. At today's price of ~ $10 per share, that's ~ 6x PE.

 

With OEC's present business model, the market was trading it at a historical PE average of 11x last year, before COVID hit.

 

 

Assuming the market gives this company a 11x-12x earnings multiple (conservative) in 2025, this implies a target price of $20+, which is 100% gain in 5 years.

 

This means an average of 20%+ annual gain for next 5 years. That's not bad.

 

 

More thoughts

 

It is likely that the recovery is better than expected, as many analysts were too bearish last month.

 

Insiders were buying all the way from March 2020 to May 2020. CEO and CFO included. I like this.

 

 

Short term, the price has increased 30% since the lows this month.  BUT ... the weekly MACD has just cut upward. This shows a turn in the intermediate trend, and it corroborates a cycling up thesis based on the cheap valuations and a psychologically better outlook on COVID impacts.

 

I would not be surprised if it hits $13-$14 by year end, especially if next quarter is better than expected and the world continues to open up. I have always thought that the lock down would not last long. I always suspected that many governments have taken the approach that the COVID crisis is war, that's one reason why the FED has been so strong in their approach. Historically high QE with quick reaction time.

 

COVID crisis is war in the sense that if one country is on lockdown say 1 more month than other country, it will structurally destroy that economy and supply chains might be permanently rerouted somewhere else. Also, that 1 month different will allow one country to buy over strategic assets in another country. That was India's concern over China. But, India is probably not alone in thinking so, it's just that the was the one that got into the main stream news.

 

My point being that every country is going to try to optimize opening up versus living through the COVID19 infections. So I think the global economy will recover quicker than many think.

 

CONCLUSIONS

 

If you think cars are going back on the road this year (I do), then this globally competitive carbon black producer is a good longer term hold. Cash flow rich, has it's niche and slowly growing.

 

Even if you accept analyst's 5 year EPS estimates which are probably a little more bearish, that's still a good long term investment. Insider buying suggests to me that they either agree with the analysts or they think it's even better.

 

For those who are very short term traders and insist on a better price, I suppose you can wait for a pull back. But in terms of value, the $9 range is where the CEO bought more of the stock compared to $13 in March.

 

Weekly MACD cutting upwards shows momentum has likely swung into recovery territory.

 

If you already have stocks that have surged (like tech stocks etc) and are looking to move into a laggard that will recover as the COVID impacts die down, you might want to consider this value stock.

 

 

Remember:

 

1) Do your due diligence to understand the business model and risk.

 

2) When it comes to bottoming snap-back plays, diversification is necessary. This is a probability play in uncertainty. The ones that work out usually more than make up for those that don't work as well.

 

 

I'm busy working on my book on "Faith, Financial Markets and Godly Wisdom" Book. Pray for me.

 

God bless!

 

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Disclaimer: This site has been designed for informational and educational purposes only and does not constitute an offer to sell nor a solicitation of an offer to buy any security which may be referenced upon the site. Please consult your own financial adviser to determine what trade is appropriate for you. See our full disclaimer here.

 

 

 

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