Nexeo reported Q3’17 estimates that we’re in-line with street estimates, but guided down the FY EBITDA to $180-185MM from ~$191MM previously. Despite showing double-digit EBITDA growth for the second consecutive quarter, the second guide down for EBITDA this year was disappointing. Nexeo attributed the miss to continued supplier disruption that has plagued the company to date as well as a surge in freight costs (both accounted for ~$5MM impact on the year).
While this is a disappointing outcome, there’s a few things to be optimistic about:
- From the call, its sounds like their Ultrachem acquisition was a good purchase – it has double-digit EBITDA margins (vs. Nexeo’s mid-single digit) and is growing double digits
- Pricing is up in both chemicals and plastics as we lap the effects of crude tanking over the past 2 years (most chems and plastics are priced as crude derivatives)
- Q3’17 was lapping a very easy comp and the good news is that the next 2 Q’s should be easy comps as well, as seen below, since we are lapping some quarters that were down significantly in 2016. Plus, we’ll have a full quarter contribution from the Ultrachem acquisition rolling through (my estimates shown for Q4 and Q1)
Plus, the stock is dirt cheap. I’d also like to share my model summary below. As can be seen, Nexeo is going to generate a lot of free cash flow relative to its market cap over the next few years. I assume they first pay down their ABL, but then the remaining cash builds on the balance sheet. In reality, I bet the company either does more acquisitions to bolster growth or buys back stock due to the heavily discounted valuation. Note, I use 100MM shares below to account for diluted shares + founder shares + warrants, although the latter 2 are way out of the money, I show it for conservatism.
Nexeo still trades at a 2-3x turn discount to peers and its FCF to equity is in the mid-teens which makes it one of the most compelling stocks I have seen. I think the stock could easily be worth $15, based on a 6.5% FCF yield to equity, which is still a lot.
Let me hear your thoughts.
-DD