Celanese Earnings: Volume Decline Weighs on Profits, but Cost Reductions Should Boost 2024 Outlook

Celanese’s CE third quarter showed mixed results that changed our 2023 and 2024 outlooks. Having updated our model for lower 2023 results and higher 2024 results versus our prior forecast, we maintain our Celanese fair value estimate of $160 per share. Our narrow moat rating is unchanged.

While we reduced our 2023 outlook to reflect no demand recovery at the end of the year, we increased our 2024 forecast to incorporate Celanese’s cost reduction initiatives that should translate to higher profits next year and beyond. Celanese shut down production at four facilities in its downstream engineered materials segment, with the goal to eliminate higher-cost production and allow its lower-cost facilities to operate at a higher utilization rate, which should boost EM segment profits in 2024, even in a slower demand recovery environment. We are in favor of these actions by management to reduce unit production costs, which should support Celanese’s cost advantage moat source, which underpins our narrow moat rating.

Celanese’s end markets are among the most cyclical in our chemicals coverage, with autos and building and construction making up the majority of sales. Despite near-term declines in building and construction, we generally see long-term growth, particularly in autos as Celanese can sell more content per vehicle for EVs and hybrids versus internal combustion engines.

Celanese’s stock was down 3% at the time of writing, due to management’s 2023 guidance cut driven by continued customer inventory destocking that will weigh on fourth quarter results. At current prices, we view Celanese shares as undervalued, with the stock trading in 4-star territory and more than 25% below our fair value estimate. Recovering profit margins and long-term profit growth is one of the largest drivers of our view that Celanese shares are undervalued.