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While I appreciate the blunt honesty of Avient Corporation (NYSE:AVNT) CEO Bob Patterson on the recent earnings call of the company, it doesn’t change the fact that the company is going to face some difficult times now and in the future.
Patterson is citing a significant decline in global demand based upon recession fears, inflation, rising energy costs, FX, the conflict between Russia and Ukraine, and the continuous lockdowns in China in response to COVID-19 breakouts.
The consequence of these factors is AVNT is seeing significant destocking of inventory among many of its customers, resulting in an ongoing reduction in orders. This isn’t going to change anytime soon.
After hitting a 5-year low of about $9.00 per share in mid-March 2020, the company’s share prices soared to a 52-week high of $60.83 in mid-November 2021 and has since dropped by over 50 percent before rebounding to trade a little above $33.00 per share as I write.
Looking ahead, I think its share price is going to remain under pressure under the current environment the company is operating in, and it’s likely to fall further for longer before finding a bottom.
In this article, we’ll look at some recent earnings numbers confirming the challenges the company faces, the selling off of its Distribution unit to shore up its balance sheet, and how things look for the next year or so.
Some of the numbers
Revenue in the third quarter was $823.3 million, up about $5 million year-over-year, but missing by $27.52 million. Revenue for the first nine months of 2022 was $2.6 billion, up from the $2.5 billion of revenue in the first nine months of 2021.
Although those numbers don’t appear to be terrible, it appears from management commentary that they’re going to get worse before it gets better. I’m not sure Patterson is simply managing expectations or sees headwinds that could be devastating to the company in the current quarter and heading into 2023. I tend to think it’s probably both.
EPS from continuing operations in the third quarter was $0.59, down 3 percent year-over-year.
Operating income for the third quarter was $40.6 million, down over $12 million from the $52.8 million in operating income from the third quarter of 2021.
Net (loss) income in the reporting period was (10.7) million, collapsing from the $52.6 million in net income produced in the same reporting period last year. For the first nine months of calendar 2022, net income was $158.5 million, down from the $201.7 million in net income in the first nine months of 2021.
At the end of the third quarter, AVNT had cash and cash equivalents of $544.4 million, down almost $57 million from the cash and cash equivalents of $601.2 million it held at the end of the first nine months of 2021.
Long-term debt at the end of the reporting period was $2.5 billion, significantly up from the $1.85 billion in long-term debt it held at the end of calendar 2021.
While there’s no need to panic, the numbers are definitely not showing signs of improvement, and I believe that’s going to continue on for some time until the economic environment and sector it’s operating in vastly improve.
Divesting of its Distribution business
One of the steps AVNT took to bolster its balance sheet and increase working capital was to offer its Distribution business for sale, which distributed about “4,000 grades of engineering and commodity grade resins to custom injection molders and extruders.”
That has recently completed the $950 million deal with H.I.G. Capital. The company expects to have approximately $750 million in after-tax revenue to work with, which will be used “to pay down near-term maturing debt.”
The two major reasons for selling the unit were to advance its strategy of becoming a “pure-play specialty formulator,” and to continue to be “modestly levered” in order to mitigate risk in a weak economic environment and to be positioned to take on acquisitions in the future when opportunities present themselves.
With no debt maturing in the short term and ample liquidity, the company appears able to ride near-term headwinds, even if its upside is very limited at this time.
Conclusion
With the exception of Latin America, where sales were up 18 percent in the third quarter in response to expanding its footprint there and an increase in packaging applications sales, all regions were experiencing a downturn.
And as mentioned above, the drop in demand has brought about destocking from its customers, which has triggered a reduction in customer orders.
Since it is highly probable, economic conditions are going to get worse before they get better in the near term and could weaken further if the recession goes deeper and longer for a prolonged period of time.
Under that scenario, Avient will continue to underperform for the foreseeable future, with no idea of how long it’ll take to return to doing business as usual.
AVNT has prepared for and positioned itself to go through a period of economic weakness, but I don’t see the share price of the company rebounding in the near future unless the Federal Reserve and other central banks reverse or significantly reduce their current course based upon slowing inflation, and more positive sentiment returns to the markets, this is going to be a long and painful period for AVNT and its shareholders.
The question now is, how much of this is already priced into the stock after dropping over 50 percent from its 52-week-high, and how will its share price respond if the recession gets worse?
Avient is going to continue to be a “house of pain,” although it has mitigated some of the risks with the selling off of its Distribution business while removing its exposure to short-term debt by paying off its $600 million in 2023 Senior Unsecured Notes and reducing $150 million of its term loan debt. The best to hope for is for the company to find some type of bottom for now while it waits out the economic and geopolitical environment that is wreaking havoc on the industry it competes in.
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