Dear readers/followers,
I’ve been covering Wacker Chemie (OTC:WKCMF) for some time now, and maintain a small position in this basic materials/chemicals business. While the market at this time is extremely volatile for businesses like this, my investments go into the 3-8-year ranges – at the very least, to see their relative upsides and returns. Some of the investments I have made as of late are just now getting into a position where I would consider them in a position to be “ripe” for harvesting.
Some are likely to take yet another 2-3 years before getting there.
Wacker Chemie is a business that is quite likely to see near-term detrimental results and declines, in part due to a forecast for a somewhat negative earnings trend for this year – following a very unfavorable 75% decline in adjusted EPS for the 2023 fiscal (albeit more or less expected). It also now, due to the decline, leads to a situation where the company yields actually less than what any conservative savings account gives us at this time – 3.8% for me at this time, to give a reference point.
However, I will be clear about the point that I see Wacker Chemie AG as being a company that will see an upside once the macro turns, and in this article, I’ll update you on the company.
Let’s see what we have here.
Wacker Chemie AG – The company is likely to remain low until at least 2025E
I can be clear about my expectations here because signs across the silicone and polysilicon macro as well as the polymer macro show that things are not in a swift turnaround here. It has to do with construction and infrastructure, but also overall economy and trends.
However, Wacker Chemie AG, as a business, remains a very solid one. We have over €6.3B in sales, and over 15,000 employees generating over €800M worth of EBITDA from 27 sites in 4 business segments. While Silicones/polysilicones remain core, Biosolutions are on the rise as well.
Wacker Chemie remains one of the few companies in the market that is a fully integrated supplier of specialty silicones. This goes into products for rising segments, including but not limited to smart construction, e-mobility, renewables, and sustainable input materials and raw materials.
While current financial performance and margins are not all that great – in fact, they’re down to 9% in margins from 22% not that long ago, there is a rise and fall to this, as you know with companies that are in segments volatile such as this one.
Meanwhile, polymers are actually going quite well, and aren’t experiencing much of the aforementioned pressure to its top or bottom line.
Adding to this, although it’s still quite small, is a growing biotechnology business with leading microbial manufacturing tech. The company has jump-started into advanced medicine production, such as mRNA and pDNA, and has already successfully purchased, managed, and integrated several biotech sites. It’s therefore a chemical business that couples these attractive segments of medicine/biotech and basic materials. Advanced medicine and “clean food” are a focal point of the company’s ambitions, and while margins here currently are dismal – down from 16% to 2% EBITDA, the actual sales are up significantly in less than 10 years.
So, I expect quite a bit from that.
Silicones and Polysilicones also aren’t the same thing, if you’re not that “into” chemicals. Wacker remains one of the leaders in high-end solar, it is, in fact, the leader with a #1 place with double volumes in the past 5 years.
So there’s that, and the company has very strong trends with strong sales and customers. While the heights of this segment seem over for now, with margin pressure, cost pressure inflation, and the like, the company’s forecasts and expectations here remain quite solid.
The company has lofty long-term targets – all the way until 2030, in fact, reaching sales over €10B with an EBITDA margin of over 20%. The company has managed such margins in the past, so it’s not all that strange. ROCE is also a key KPI for the company, and Wacker estimates 2x the cost of capital, with strategic growth projects to achieve these goals found in the areas of specialty silicones, tandems, biologics, and the semiconductor sector.
Capital allocation for the company is not going to be dividend-heavy until earnings get better. Wacker has a strict 50% net income payout, and for 2023 that is €3/share. That also means that for 2024, we can expect this to drop, if the company targets are to be believed here.
The latest results, which are only a few days old, fresh off the presses, mostly confirm the transitionary nature of the current period. Sales are down 15%, EBITDA is down by more than 30%, and margins company-wide are down below 12%. Net income is not even €50, down from €150M YoY – though the company’s net debt is less than 2x its quarterly EBITDA – so in terms of leverage, Wacker is still very conservative.
Despite being so volatile, Wacker is continuing to earn awards for its operating costs and efficiency specs as a result of the WOS – or the Wacker Operating System, its corporate approach to business. This did not make the P&Ls any more palatable for this quarter, but it promises an upside when the market turns around because Wacker is a known, profitable operator regardless of segment, with very few exceptions.
The company’s financials and fundamentals remain stellar, with almost €5B in corporate equity, and €1.3B in available liquidity set to a net debt of less than €350M. Speaking of fundamental danger for this company just isn’t really possible here – Wacker is too solid for that, even if the trends are volatile.
Going forward here, I expect the macro to dictate a poor 2024 – even if the company outperforms peers, it cannot go against the global macro and the overall economy, nor should it be expected to.
Instead, we should expect the eventual upside and calculate based on what this could result in for the next 3-5 years.
So let’s do just that in the next segment.
Wacker Chemie AG – Plenty to like about the long-term valuation implication
The long-term implication of investing in a market outperformed in terms of efficiency continues to be a positive one. 2024E is indeed a set of results that are currently going into the negative, as is being forecasted by S&P Global/FactSet analysts as well as myself. However, beyond that, things are looking much better.
For the 2025-2026 period, we’re expecting results to turn around and result in an annualized growth rate of well above 15% here. 2025E is currently expected to be the turnaround year – but even if that’s not the case, and this is delayed a year, I believe with conviction that the macro turnaround will come. If the company sticks to its 50% dividend policy, then we may see €5/share in dividends in 2026-2027E, which would dial the yield up again to 5-6% depending on when you buy in. However, if you do buy in under that premise, and assume a 15x P/E, you can expect the following annualized rate of return for the company.
One of my core tenets has always been that I want to beat the market – and I currently do. However, it’s important to realize that a hard-and-fast goal like that can really also result in some unfavorable situations. If you become overly focused on this, and only pick investments that match this or exceed this, you’re liable to take on more risk than you perhaps like. My target has been for several years now that I want 15% or above annualized. Over the past few months, though, I’ve been running estimates and sensitivity tables to see what the implications would be of lowering that to 10-12% per year, taking into account higher quality.
I do this because what is important for me is the combination of attractive income together with good growth. The market is a good comparison here, but I don’t want to follow anything to a ridiculous degree.
I tell you this in this article because I expect that Wacker may actually trade at a 14-15x P/E, but even that fulfills my targets here – and is one of the underlying explanations as to why I invest how I invest, even if the forecast were to go down below 16% annualized.
Other analysts, when looking at Wacker Chemie AG, are equally positive, but with different targets. My last target for Wacker was €140 – and I am not changing that as of this article. However, in the past year, analysts have moved from €165 to less than €128 for the company – and I don’t see a decline in estimates or fundamentals to justify such a move. Also, fewer analysts are now recommending this as a “BUY”. Currently, 15 analysts follow the company with a low-end target of €103, and a higher-end target of almost €180/share, coming to an average of €127. That’s a 26% upside, and 9 out of 15 analysts are at a “BUY” or “Outperform” for the company here.
At my P/E estimate of around 15x, you realize that we’re working with a forward price of almost €150/share. So my price target of €140, which is calculated on a discounted 15x P/E for 2025E, is very conservative here because Wacker Chemie consistently trades above 15x P/E. The long-term normalized multiple of earnings is closer to 20x P/E.
For that reason, and this upside of over 15%, I give the company the following targets and my updated thesis for 2024E.
Thesis
- Wacker Chemie is a leader in silicones and polysilicon. It’s moving from commoditized chemicals to specialty chemicals, where much of the appealing, stable margins lie and I expect that the company will manage this move well over time. At the right valuation, I consider this company to be an attractive “BUY”.
- The company currently trades at an average weighted P/E of 7-9x, depending on where you look and what you estimate. I believe this to be too cheap, despite believing in full a 70% EPS drop from the 2023A highs during this year, and with a high upside for the next few years.
- That makes, in my mind, Wacker Chemie AG a “BUY” here. I give it a target of €140/share conservatively, and I am buying shares at this price. I reiterate this target as of the update for 2024 and for the next few years.
- I am buying more shares – though I am buying them slowly, and my position is nowhere near the overall size I expect it to be once I am done “purchasing” here. I expect Wacker to become one of my larger chemical holdings over 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 based on earnings growth or multiple expansions/reversions.
Wacker Chemie continues to, as of 2024, fulfill 5 out of 5 of my criteria here, making it a solid “BUY”.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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