AdvanSix Stock: Advancing Along (NYSE: ASIX)

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AdvanSix (ASIX) has been advancing in a spectacular fashion, having seen a very strong recovery since the pandemic. Early in 2021, I concluded that the company was not really advancing, as that conclusion was drawn a bit too early with shares trading at just their twenties at the time. What followed was a spectacular recovery, leaving me wondering what’s next here.

The Story

AdvanSix has been one of the many industrial names being spun-off from Honeywell (HON) in recent years, although the spin-off from its former parent goes back all the way to 2016.

The company is a producer of ammonium sulfates, nylon and chemical intermediates, all generally seen as commodity businesses, albeit that some of this volatility is offset by a strong correlation between input and selling prices. Input prices are tied to energy prices and oil prices, which is very noteworthy in this environment, with output pricing depending heavily on fluctuations in demand on top of the correlation with the input pricing.

Back in 2017, the first year following the spin-off, the company posted sales of $ 1.5 billion on which it reported adjusted EBITDA around $ 200 million and net earnings just shy of the hundred million mark, at around $ 3 per share, as this performance valued shares in their forties at the time. That however seemed to be above average margins, as the company has furthermore been suffering from poor cash flow conversion as it needs to upgrade many facilities at a cost far greater than the depreciation charges.

After revenues were flat at $ 1.5 billion in 2018, they fell to $ 1.3 billion in 2019, as earnings fell to just around $ 1.50 per share, with free cash flow actually turning negative on the back of the large net capital expenditure requirements, related to upgrades in the infrastructure. 2020 was a difficult year amidst the pandemic as earnings likely come in around a dollar per share, which together with share trading at $ 21 resulted in a higher valuation, although it is fair to see that the company was under-earning at the time. Net debt came in around $ 300 million, or about a 3 times leverage ratio with EBITDA trending around the hundred million mark.

Sticking with my $ 2 earnings per share number as a long-term realistic number, valuations looked quite compelling at just $ 21 per share early in 2021, certainly as some green shoots were seen at the time. While the financials looked reasonably okay, I feared the increased focus on ESG, as well as environmentally more friendly alternatives, as I feared that the company was facing an uphill battle, which made that I was not initiating a position.

A Huge Recovery

I have been far too cautious last year as fast-forwarding just over a year in time, shares have rallied in a huge way, trading at $ 47 per share, near their absolute highs.

Momentum started with first quarter sales in 2021 being up 24%, driven by a good combination of material pass-through pricing, higher volumes and price realization, as this combination resulted in quarterly earnings of $ 0.98 per share. These trends only fortified during the second quarter, with revenues up 88% (albeit vs. easy comparables) as earnings rose to $ 1.53 per share! Momentum was maintained in the third quarter, as earnings came in at $ 1.51 per share, yet earnings reverted to $ 0.80 per share in the fourth quarter. This actually marks a small decline on an annual basis.

While the fourth quarter ended a bit softer, the year as a whole was very strong as sales came in at $ 1.68 billion, EBITDA was posted at $ 255 million, as net earnings came in at $ 140 million, equal to $ 4.81 per share. These huge earnings resulted in net debt being cut to just $ 120 million as a 3 times leverage ratio comes down to just 0.5 times in the time frame of a year! It was not just a boom in earnings power which boosted cash flow conversion, as net capital investments of the business have been minimal, actually non-existent over the past year.

Part of the strong balance sheet has been used to acquire US Amines, a North American producer of intermediates which are used in agriculture, pharmaceuticals and other applications. The deal comes at a price tag of $ 100 million and was announced alongside the release of the fourth quarter results. The deal is set to be accretive to earnings, although this impact has not been quantified, and with an estimated $ 70 million revenue contribution in 2022, the deal comes at a 1.4 times sales multiple. In comparison, this compares to AdvanSix itself trading around 1 times sales here.

What Now?

Truth is that I have been far too cautious when I decided to hold off in January of last year at $ 21 per share. Shares and earnings have seen a huge boom during the year, as I am quite surprised to see shares trade near their highs, even as the fourth quarter marked quite a pullback in earnings, albeit that planned turnarounds hit the results in a bigger way in the most recent quarter, making the earnings number not really representative.

In the meantime, the shares have seen a huge lift since the war broke out between Russia and Ukraine, as this comes on top of guidance which calls for significant earnings growth in 2022 already. While the demand for nylon, caprolactam and certain chemical intermediates might not see a huge shift, demand for ammonium sulfate is likely very strong, with food supply under threat, despite already sky-high prices for these products. That is good news for the company, although I fear the rapid increase in energy prices to the other parts of the business as well.

Amidst all of this, I found myself in doubt. While I am the first to admit that my stance last year was too conservative, I am wary of the fact that the current earnings trend is far above my estimated long-term earnings power. While near-term earnings are likely strong and leverage is not a concern (not even after the recent deal), I fear that softer operating momentum (at some point in time) leaves shares vulnerable. This is even the case as current earnings multiples are very low at 10 times and at even lower forward earnings multiples.

Hence, I am still finding myself performing a balancing act, as I lack the conviction to initiate a position here, despite the greater recovery and prospects for another strong 2022.

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