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Value Investor Daily #63
Finding Value with a Reverse DCF Approach
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A Reverse Discounted Cash Flow analysis starts with the current market price and figures out what kind of growth is priced in.
If the market expects very little growth from a company that has shown strong performance in the past, that could mean opportunity.
For this analysis, we used a few simple criteria to screen for reverse DCF opportunities:
Reverse DCF ≤ 2.33%, which matches the current expected 10-year forward inflation rate. This means the market expects no growth beyond basic inflation.
10-Year EPS Growth Rate ≥ 10%, which shows the company has grown its earnings consistently over the past decade.
Forward Expected EPS Growth Rate ≥ 7%, indicating decent forward growth expectations over at least the next 5 years.
Screen Results
Here is a summary of 9 companies that made it through the screen:
Company Name | Ticker | Reverse DCF Implied Growth Rate | 10-Year EPS Growth Rate (CAGR) | Analysts’ Future EPS Growth Rate |
|---|---|---|---|---|
PulteGroup Inc. | 1.87% | 19.60% | 7.12% | |
Globe Life Inc. | 1.30% | 10.10% | 11.45% | |
Celanese Corporation | -0.63% | 15.00% | 10.42% | |
Taylor Morrison Home Corp | 0.39% | 18.30% | 13.29% | |
SLM Corp | 0.25% | 22.00% | 10.77% | |
M/I Homes Inc | -0.12% | 24.70% | 12.19% | |
Tri Pointe Homes Inc | 0.52% | 22.20% | 15.76% | |
Century Communities Inc | -0.38% | 31.10% | 18.42% | |
Virtus Investment Partners | 2.02% | 12.40% | 23.12% |
Let's examine one company that has suffered recently—Celanese Corporation, which is down 57% from its peak.
Business Overview
Celanese Corporation is a specialty materials and chemicals company that supplies industries such as automotive, electronics, paints and coatings, and other industrial products. The company uses its technical skills and scaled production capabilities to provide unique chemical solutions.
Historical Performance
Over the past decade, the company has compounded annual EPS at approximately 15%, driven by strong demand across its diverse business segments.
In 2023, the company reported record operating cash flow of $1.9 billion and free cash flow of $1.07 billion, enabling significant debt reduction and increased cash reserves.
Valuation
After the recent price drop, the market cap sits at $8 billion. It trades for 6.19X TTM cash flow.
We assumed a slower-than-historical growth rate of just 4% and came up with a fair value of $106 vs. today’s price of $73.
This difference in valuation suggests that the market is not crediting Celanese for its ability to grow earnings over time. But of course, there’s always a good reason.
Risks
Celanese operates in a cyclical industry, which means demand for its products fluctuates with the economy. If key markets like automotive or construction slow down, that could hurt its sales.
The risks are substantial here. The company recently missed on sales and earnings and guided lower for 2025, which explains why the stock has crashed. It cut its dividend by 95%—the first major cut in 20 years.
Celanese also took on a lot of debt to buy DuPont's mobility and materials business in 2022, which means they have to manage that debt carefully, especially since interest rates are still likely “higher for longer” in the wake of the election. It paid down $3.6 billion of long-term debt in 2023.
Catalysts
Several things could help Celanese close the valuation gap. If the company successfully integrates the DuPont acquisition and achieves the expected $450 million cost savings, that would boost earnings and cash flow.
A recovery in weak industrial activity in their automotive and industrial customers would also drive an earnings rebound.
The company is actively working to "supercharge" its project pipeline, particularly in the engineered materials segment, by focusing on higher-value projects, new customer acquisitions, and expansion into non-automotive sectors like electrical/electronics and high-performance athletic wear.
Conclusion
Celanese Corporation (CE) looks like a possible value investment, but it faces significant challenges. You’ll need at least a 3-year outlook on this one.
The company's strategic initiatives offer some potential upside, like the DuPont acquisition synergies, additional cost-cutting and inventory reductions, and new product pipelines.
The reverse DCF screen is a great tool for finding companies with literally zero expectations, even though they have strong track records.
Thank you for reading today!
Happy Investing,
Value Investor Daily
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