AdvanSix Stock: No More Progress (NYSE: ASIX)
In the spring, I noticed that Advan Six (NYSE: ASIX) was growing after a very strong 2021, driven by a combination of higher volumes, passed-on prices and market prices. The increase in earnings capacity and the elimination of over-indebtedness have created a compelling situation, as the company predicted a very strong 2022, before the war in Ukraine.
A bit of context
AdvanSix was separated from his former parent Honeywell (HON) since 2016. The company produces ammonium sulphates, nylon and chemical intermediates, generally considered as commodities with associated prices, although part of the volatile component is covered by a high correlation between the prices of the inputs and energy. This is a bit too simplistic, as input prices are largely tied to energy prices, while demand implications also impact market prices for outputs.
At the time of the split, AdvanSix had sales of approximately $1.5 billion of which it posted EBITDA of $200 million and net income of approximately half that, or $3 per share, shares were trading around $40 at the time.
Poor cash flow conversion, the result of the need to upgrade facilities and historically strong margins raised some questions, as a 13x earnings multiple looked visually compelling. Stocks fell into teenage hands at the start of 2020, even before the pandemic, as sales, earnings and cash flow lagged, and with all metrics under pressure, relative leverage ratios were also increasing. Years of stagnation and an increased focus on ESG made me believe the company was facing an uphill battle, which prevented me from taking a stand.
The $10 stock at the time of the pandemic reached $47 in the spring of 2022 as the company posted incredible operating performance in 2021. Full-year sales reached $1.68 billion, on which an EBITDA of $255 million and earnings of $140 million were reported, for earnings of $4.81 per share. It must be said that earnings power only reached $0.80 per share in the last quarter of the year.
With earnings power hovering between $3 and $5 per share and net debt down to just $120 million, the future is likely looking much brighter. Debt reduction is driven by strong earning power and the fact that the largest investment cycle to modernize facilities now seems to be a thing of the past, with capital expenditures of around a hundred million a year. The strong performance even prompted the company to announce a $100 million deal for US Amines.
The question is how things would develop in 2022. The war has sparked strong demand for ammonium sulphate with a threatened food supply, but rising energy prices would also hurt the business. Further being aware of weaker operating momentum and judging 2021 earnings to be historically strong, I wasn’t happy to join the $47 run in March, although the outlook was still pretty decent.
After a brief rise to $57 during the same March, shares are now back to $33 as the market and investors feared and picked up on the cyclical element of the business, as a sharp decline in $14 from March marks a serious setback.
First quarter sales increased 27%, driven entirely by price with volumes down 4%. The company posted strong EBITDA of $103 million on sales of $479 million, while net income of $63 million came in at $2.15 per share.
Second-quarter sales growth accelerated to 33%, with revenue rising to $584 million, GAAP earnings still rising to $2.23 per share, while earnings still trending very low impressive $8-9 per share! Net debt was further reduced to $130 million despite the US Amine settlement, with net debt just exceeding quarterly EBITDA generated.
Despite the strong earnings power, stocks have fallen, essentially trading at just 4x earnings here. This shows quite clearly that investors are concerned that the momentum cannot be sustained. So here we see stocks down significantly, with clean net debt and first-half earnings much stronger than expected.
With the company’s current value having dropped to the billion mark, it is very clear that expectations are low as leverage is far from a concern and current earning power is still strong which may reverse soon. It comes as economies suffer from high energy prices and monetary tightening measures taken by central banks around the world.
Right now, I feel much more comfortable buying AdvanSix as I did in March, although it is much clearer that some earnings reversal will take place. Fortunately, the company is unlikely to face financial difficulties given the strength of its balance sheet, and although earnings power may be affected for some time, the risk-reward ratio is attractive enough to slowly begin to initiate a modest position.