Chemours: The Case Amidst Board Trouble (NYSE:CC)

Dear readers/followers,

I’ve made no secret of my bullish longer-term stance on Chemours (NYSE:CC) over the past few years. The company has as of yet failed to “pop” in terms of valuation, despite what I would view as a materially attractive pricing for an attractive set of assets.

However, this article is not just a standard earnings or full-year update, because we do not yet have all of that data. In fact, it’s an update after this set of news out this morning, in which the company’s CEO and CFO as well as a few related people are placed on administrative leave by the board of directors until the completion of an internal review.

If you’re interested in my latest thesis on Chemours as a company, you can find that article here – though I’ll go ahead and warn you that this thesis is now fairly old and needs an update – which I’ll provide here as well as it’s possible, given the set of news.

So we’ll go ahead and see both the fundamental upside for this company, but also what we can expect following this set of news, and how Chemours should be discounted going forward.

Chemours – Some internal apparent challenges

So, the type of news that a Board of Directors puts a CEO, CFO, and key personnel on administrative leave pending internal reviews is never really something you want to see on one of your investments. Nor is the fact that they’ve already appointed an interim team – even if that team seems qualitative at first glance.

The board appointed current Titanium Technologies unit head Denise Dignam as interim CEO and current Senior VP and Chief Enterprise Transformation Officer Matt Abbott as interim CFO; Dignam came to Chemours (CC) in 2015 after joining E.I. du Pont de Nemours in 1988, while Abbott joined Chemours in 2017 after working for Pricewaterhouse.

(Source: Seeking Alpha, Chemours News)

I expected something to come out of Chemours given that two weeks ago they disclosed potential weaknesses in internal controls, which is again, something you do not disclose unless there are things that need to be potentially restated. Needing extra time to complete its legally required year-end reporting is never good.

The tone of expectations for Chemours was set at a low bar for this year already – but my own forecasts did not include a net loss in excess of $200M, which is what we’re going to get given the current forecast of $225-$235.

As I am writing this article during the pre-trade period, the company is in free fall. We’re talking a 31%+ decline as I am writing this particular sentence. Thankfully, my stake in Chemours has never been that high, and I’ve always been very clear in my previous articles about just what sort of risk/reward you’re looking at with Chemours. It’s always been a high-risk company.

And it’s certainly showing those colors today.

To be very clear, there is no publicly available information with regard to the internal/management issues. All we have is that the internal review is with regard to the ethics hotline, working capital management, incentive plans, and non-GAAP metrics. This can include, or not include, a lot of things.

What we have to work with are some early result indications and early loss indications. In this case, a negative net income, but these include a significant portion of pre-tax litigation settlements as well as restructuring. Gross of these charges, the company’s results would have been decent enough, even with a lower top-line result of $6B in terms of company sales, due to some expected weakness in both Titanium and Advanced Performance materials – basic materials sectors that are cyclical by nature, and given the current environment, not exactly in favor.

Fundamentally speaking, Chemours is an “average” basic materials company. It’s not the most or least profitable (except maybe this year), it’s not the most leveraged, and it’s not the most impressive, nor most unimpressive business in any of these segments. It’s certainly not a “great” company in terms of fundamentals, but it does manage 18.9% gross margins and a net income of 1.3% – and those are during its weak result periods, in this case, 3Q.

Chemours is also still junk-rated, but despite all of this, up until now, the company managed a decent enough 2023 in light of the current macro situation.

The company is a tripod-type play on Titanium tech, Thermal and Specialized solutions, and Advanced performance materials.

I’ve covered these extensively in my previous articles, so look at the last one and the ones before you’re curious. No one argues that these are not cyclical businesses, and Chemours is over 44% tilted towards the TiO2, or Titanium tech businesses, as well as around 23% refrigerants and 16% performance, but it has a very appealing mix and geographical sales profile. And if you look at the non-impacted margin numbers, those are impressive.

Important things first. The company is in the midst of a transformation plan for its Titanium technologies segment, and this plan involves reducing spending by $100M in 2024, with closures of certain assets contributing over $50M in the coming fiscal. The more volatile segments such as refrigerants are expected to be dicey in terms of top-line, but the regulatory framework for the Opteon-product that Chemours offers is very good, both with the Montreal Protocol, and with EU F-Gas Regulation (and the US AIM act).

In terms of performance materials, The company owns, among other things, these technologies.

So if you’re “new” here, and looking at investing in the 30%+ dropping company, that’s what you’re investing in.

I view the current reaction today as an overreaction. Obviously, this is without knowing all the facts from the internal processes that are currently ongoing. The potential for unpleasant surprises is certainly still very much there. However, given that the disclosed weaknesses are related mainly to internal reviewing, I am currently excluding the possibility of major operational impacts.

What does this mean?

It means that the company probably isn’t worth much less than it was yesterday – note here my use of the word “probably”.

You may recall that I updated on Grifols (GRFS) when the company faced short-selling action. This is not the same thing, but it’s a crash nonetheless, and I believe the overreaction is there. Take a look at what has happened to the share price since that specific article and the RoIR since then, and you’ll see that the potential for outperformance (I bought below $8/share) is fairly significant.

I’m not saying it’s the same thing here, but the potential for it is certainly here.

Why is that?

Valuation for Chemours – The company is worth more than $20/share

This is a Semi-enabling business and one of the more vital refrigerant companies out there. Its TiO2 business is not to be underestimated, and the company has a very clear upside in battery technology as well. There are plenty of verticals where I believe Chemours will outperform eventually.

And I want to clarify that the recent results for 2023, where we’ll see exact specifics soon enough, have very little to do with actual performance (that went down a bit), but more to do with non-recurring items.

Chemours is typically cheaply traded. Its 5-year P/E is below 9, and with trends today, I expect that to crash – and go down even further. But even accounting for that, a 2026E upside based on the current set of S&P Global and FactSet forecasts comes to a double-digit annual upside, and a triple-digit 3-year RoR above 140% as of today’s crash.

Most of the estimates and graphs are not yet updated for today’s crash – so showing you this below comes with the caveat that it needs to be adjusted for today’s crash, which pushes this 3-year upside up even further. Also, note that much of the trends for this year have already been forecasted and included. For 2024E, I expect that EPS level, barring anything unforeseen, to actually materialize.

Chemours trades at some truly amazing bottom-type valuations here. Even at the levels before the crash, this company is trading at a sub-0.8x Sales multiple, and I expect today to push that to below 0.6x on the normalized level, as well as the revenue multiple coming closer to that 1x level. We’re talking below a 6x EBITDA multiple, and if Chemours decides to stick to its dividend payout of a dollar per share, that means we have over 5% yield as well here.

The bottom line is, I do not view, despite its junk rating, that Chemours is worth “only” this much. Per the crash today, the normalized P/E is down below 7x. We’re not at levels where historically speaking it has always been a very good idea to buy Chemours from a total RoR perspective.

I am not claiming that I am going to buy tens of thousands of shares in early trading here. I would also say that in cases like these, you really want to make sure you know your investment targets and your risk tolerance.

I will say this though.

Many of my large returns have been made in exactly positions like these. I’m talking about the investments where I have been able to walk away with 200-500% RoR in less than 3-5 years. In order to get those returns, you have to be willing to take that downside risk and go against the grain.

I am, but I’m very careful to only do this at the times when I am buying tangible assets with a value. As an investor, I’m fairly averse to investing in certain types of assets or investments, mainly tech and software, that are difficult to evaluate.

I do not view this company’s assets as suffering from the same problem. I like Chemours market position, I like the company’s operations, and I say that Chemours has a bright future in a cyclical market, even if that future may take 2-3 years in coming.

So at the market open today, I will keep a very close eye on Chemours, and over the next few days, depending on what I hear, I may add. I may buy today even and add more to my position.

As long as I am not convinced the thesis has changed, I never have a problem with declining share prices. In this case, I do not view Chemours thesis based on the information we’ve gotten as materially affected. As a board professional myself, I know well the things that can happen in a company, and where the BoD needs to act for the good of the company. If that is what Chemours board has done here, then they deserve praise for this – though at this time, it’s too early to say.

Bottom line, here is my updated thesis for Chemours.

Thesis

• The company is fundamentally appealing due to its chemical portfolio but is hounded by potential legal issues and risks – both future and historical, as well as an unappealing liability profile. The recent disclosure is only the latest example of this. This needs to be discounted, but it’s entirely possible to do so – just keep your targets below 10x P/E and a share price of $29/share, adjusted for the new information and another 15% discount.
• I keep CC as a “BUY” and “Bullish” rating, with an overall price target of $29, below the current analyst average, but considered fair on a peer and risk/reward comparison. As of February 2023, I am not shifting my target here.
• I do clearly maintain a “speculative” rating on the stock, however, and I would not make this a core position in any portfolio at this time.

Remember, I’m all about:

1. Buying undervalued – even if that undervaluation is slight, and not mind-numbingly massive – companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.
2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
3. If the company doesn’t go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.

Here are my criteria and how the company fulfills them (italicized).

• This company is overall qualitative.
• This company is fundamentally safe/conservative & well-run.
• This company pays a well-covered dividend.
• This company is currently cheap.
• This company has a realistic upside that is high enough, based on earnings growth or multiple expansion/reversion.

As things stand now, the company is still a “BUY”, and it fulfills every criteria that I have except one – the quality, due to its non-IG-rating. However, it’s very “speculative”, and that needs to be kept in mind.