1COV.DE - Covestro

[perulv]

Have anyone looked at Covestro (1COV.DE, trading at DAX)?

 

The company is priced low (EV/Ebit around 4, which seems crazy), and seem to be a quality company. Debt is around 50% of total assets, ROE is high (44% according to Ycharts, and it has been over 30 since 2017). They are one of the leading companies in their industry. When I search for information about the company, I mostly find positive news, like https://www.bizjournals.com/pittsburgh/news/2018/10/19/best-places-to-work-category-winner-covestros.html 

 

Still, the stock-price is tanking, down 33% this year. What am I missing? Clearly, “the market” sees something I don’t. I see that the overall german market has trended downwards for almost a year. And I get that there is a lot of uncertainty regarding trade wars etc. But if my math is anywhere close to correct, Covestro would be low priced even if their earnings for 2018 ended up considerably lower than for 2017 (2017 ebit 3 billion USD, EV right now around 13 billion USD). I am looking forward to the Q3 results on Thursday, October 25.

 

Covestros earnings, ROE etc has improved quickly since they were spun of from Bayer in 2015. Perhaps the fear is that this will revert to normal, and thus bringing the earnings way down in the future? Or is this just a bargain?

 

(This is my first post here. I don't know if one should disclose holdings? I bought Covestro at €80, and thought it was a bargain then. Today at €57 I guess it is more of a bargain, but I am also looking for reasons that I'm wrong.)

 

(edit: here is a Seeking Alpha article on Covestro https://seekingalpha.com/article/4212159-covestro-ultimate-buying-opportunity-fcf-yield-16_0-percent )

[sjh]

The market expects that the prices they are currently charging won’t be sustainable. Lots of new capacity is being ramped up by competitors.

 

Nevertheless at current prices you get a good margin of safety I would say.

[Spekulatius]

The market expects that the prices they are currently charging won’t be sustainable. Lots of new capacity is being ramped up by competitors.

 

Nevertheless at current prices you get a good margin of safety I would say.

 

Yes, that’s it in a nutshell.The EBITDA margins from 20-30% that the company is generating for commodity polymers are not sustainable. I expect these to drop to the mid teens.

[perulv]

Well, turns out "the market" (and you) was not totally wrong  ::) http://www.plasticsnews.com/article/20181025/NEWS/181029944/covestro-cutting-900-jobs-globally

 

I'm keeping my position, but trying to learn more about the issues brought up in /forum/general-discussion/sources-for-information-about-the-german-market-(and-general-thoughts-cycles)/. As far as I can tell, there is a lot of negativity baked into the current price.