The industrial world is full of companies that operate in special niches, many of which investors are not aware of, but are critical to global growth or a clean energy future. On of these under-the-radar companies is Ecovyst Inc. (ECVT, Financial), which provides specialty catalysts and related services on a global basis.
The Ecoservices segment provides sulfuric acid recycling services and end-to-end logistics for production of alkylate for refineries as well as virgin sulfuric acid for mining, water treatment and industrial applications. The Catalyst Technologies segment offers customized catalyst products and process solutions to producers and licensors of polyethylene and methyl methacrylate. These catalysts support the production of plastics used in packaging films, bottles, containers and other molded applications.
The company was formerly known as PQ Group Holdings Inc. and changed its name in 2021. Ecovyst has a history dating back to 1831 and is headquartered in Malvern, Pennsylvania. The company currently has a market capitalization of $1.3 billion.
Clean energy efforts
The company’s core products contribute to lower emissions, cleaner air, higher fuel efficiency, cleaner fuels and help advance the global goal of cleaner energy. These products and offerings help companies in the production of renewable fuels and help to produce vehicles with improved fuel efficiency and cleaner emissions and are predominantly inorganic and carbon-free. Regeneration services support the production of alkylate, which is a high-value gasoline component that is critical for meeting stringent gasoline standards. Tightening of gasoline standards and increased demand for higher octane premium-grade gasoline to power high-compression, more fuel-efficient engines has resulted in higher utilization for the company’s alkylation units. The silica catalysts business supplies critical catalyst components for the production of high-density polyethylene, which is a high-strength plastic used in bottles and containers.
Ecovyst is a market share leader, holding what is estimated to be the number one or number two supply share position for products that generated more than 90% of 2022 revenue. The company’s global footprint global footprint and efficient network of strategically located manufacturing facilities give the company a strong competitive advantage in serving its customers.
Financial review
The company appears to be firing on all cylinders as key industry trends remain favorable, as shown by fourth-quarter and full-year 2022 results. Revenue increased 7.4% in the fourth quarter to $182.8 million and net income increased 176% to $21.5 million. Earnings per share were 17 cents and the net margin increased to 11.8%. Adjusted earnings per share, which excludes stock-based compensation and unusual items, was 25 cents. In connection with a secondary stock offering, the company repurchased 8 million shares at an average price of $7.88 for a total cost of $63 million.
For the full year, sales were $820.20 million, which was an increase of 34.20% when compared to 2021. Adjusted net income was $113.20 million and adjusted earnings were 84 cents per share, a 59% increase from the prior-year period. Adjusted Ebitda was $276.8 million, an increase of 21.6% compared to the prior year.
Cash on the balance sheet at year-end was $110.90 million and total debt stood at $874 million. The net debt leverage ratio was reduced from 3.3 times at the end of 2021 to 2.8 times at the end of 2022. Share repurchases for the full year totaled $136.70 million.
In a statement, CEO Kurt Bitting said, “The fourth quarter of 2022 was another quarter of solid financial performance for Ecovyst. Demand trends in the industries we serve remained positive, providing for a strong finish to the year. As a result, full-year 2022 Adjusted Ebitda for Ecovyst was up 22% compared to 2021, and above the high end of our guidance range. In addition to delivering on our financial goals, we had other notable achievements in 2022. Exceptional cash generation supported the significant reduction in our net debt leverage ratio to 2.8x and enabled increased shareholder value through $136.7 million of share repurchases."
Valuation
The company’s 2023 guidance calls for sales in the range of $760 million to $790 million and adjusted Ebitda of $293 million at the midpoint of the range provided. Free cash flow is expected in the range of $115 million to $130 million.
The consensus analyst earnings per share estimate for 2023 is $1 and for 2024, the estimate is $1.27. That puts the company selling at roughly 11 times current year earnings. The enterprise value/Ebitda ratio is 7.3, which is in line with industry averages.
The GuruFocus discounted cash flow calculator creates a value of approximately $16.50 when using $1 in earnings per share as the starting point and a long-term growth rate of 8%.
The average price target from the five analysts that cover the company is $14.50, with a high target of $18 and a low target of $11.
The company does not currently pay a dividend.
Guru trades
Gurus that have purchased Ecovyst stock recently include Jim Simons (Trades, Portfolio)' Renaissance Technologies and Hotchkis & Wiley. Investors who have reduced or sold out of the positions include Joel Greenblatt (Trades, Portfolio).
Summary
Bitting recently said, “We have an exceptional opportunity to help our customers meet the clean energy and plastics needs of the global economy and prepare for a sustainable future.”
As such, this under-the-radar clean energy stock appears to be undervalued at this time and may represent a solid long-term investment opportunity for patient investors.
