Here’s a question for you … which of the following products do you see going bust anytime soon: paints, anti-freeze, fuel, or industrial solvents? If none of these are going out of business, then why is a company that manufactures a key ingredient for all these products taking a pounding on the stock market?
Methanex (TSX: MX)(NASDAQ: MEOH) is the world’s largest producer and supplier of methanol to major international markets in North America, Asia Pacific, Europe, and South America. The stock is trading at $54.23 — over 35% down from its 52-week high.
Rough patch
It’s been a rough year for the company, and its third-quarter numbers for 2019 didn’t help matters. Sales declined over 37% year on year to $650 million from $1.04 billion. The company reported a net loss of $10 million compared to a net income of $128 million in the third quarter of 2018. Adjusted EBITDA for the third quarter of 2019 was $90 million compared to $293 million for the third quarter of 2018. This is a fall of almost 70%.
Methanex’s average realized price (ARP) for methanol declined by $54 per tonne to $272 per tonne in the Q3 of 2019 from $326 per tonne in Q2 of 2019.
A major reason for Methanex’s woes is the decreasing price of methanol. Methanol prices have tanked in North America from US$516/metric tonne in October 2018 to US$340 in September 2019. It’s the same situation in China, with prices dropping from $344 to $238 in the same period.
All the bad news aside, the company ended the third quarter with $857 million of cash on the balance sheet, after returning $27 million as dividends to shareholders. That’s a lot of cash.
Future growth
While falling methanol prices are impacting the company’s top line, let’s see what Methanex is doing right. The company is deploying its cash smartly. In Louisiana, Methanex has begun construction of its Geismar 3 plant, which will be a 1.8 million tonne methanol plant located adjacent to existing facilities. Methanex expects this project to deliver good returns based on its substantial capital and operating cost advantages.
Methanex is also making progress on the de-bottlenecking opportunities at existing Geismar 1 and Geismar 2 facilities to increase production by approximately 10% over the next couple of years.
Methanex stock has a forward dividend yield of 3.47%. The forward P/E multiple for Methanex is 15.55. There is room for the stock to go up, especially considering its robust earnings growth. Analysts expect Methanex’s earnings to fall by 87.2% in 2019 due to its revenue decline of 27.3% this year.
However, the company is estimated to grow sales by 4.7% and its earnings is estimated to grow by a solid 200% in 2020. Despite the 88% earnings fall in 2019, analysts expect it to rise at an annual rate of 22.2% over the next five years. This suggests earnings will rise at an annual rate of 115% between 2019 and 2023.
If you had listened to Fool contributors Nelson Smith and Kris Knutson and gone in for Methanex in September and October, you would have made a gain of 20% already. You also have to consider the fact that this stock has given over 11% annual returns over the last 10 years.
When you are looking at bargain buys, you should look at the future potential of the business. As the world economy starts doing better, it is only a matter of time before demand for methanol starts to revive. When that happens, Methanex is perfectly placed to reap the benefits. It wouldn’t be a stretch to expect the stock to regain its 52-week high and more by the end of 2020.
