Morningstar | Covestro’s EBITDA Flatlines in 3Q; Shares Fairly Valued
No-moat Covestro reported third-quarter EBITDA of EUR 859 million, flat over the prior-year period. This officially ends a 14-quarter streak of uninterrupted growth. Shares are reacting mildly today; however, the stock is down 25% in the last month and around 40% from the peak in February. We have been calling out the stock as significantly overvalued for some time as we expected temporary supply disruptions in the polyurethanes market to fade. Consequently, the significant share decline this year has only brought the stock back into fairly valued territory with our EUR 52 fair value estimate.After two years of blockbuster growth, the polyurethanes segment posted its first quarter of weak results. EBITDA was down 22% in the third quarter over 2017. Some one-offs contributed to the negative result including an unplanned shutdown at their MDI plant in Caojing and a force majeure at a supplier for their polyether polyols in Europe. Regardless, we see further EBITDA declines ahead. The company indicated that the TDI market is quickly normalizing and no further abnormal profits are to be expected in the fourth quarter.
Strength in polycarbonates continued in the third quarter with EBITDA up 49% over 2017. Environmental restrictions in China have caused commodity polycarbonate markets to be short during 2017. However, we also see this as a short-term situation. Supply chains are already adjusting and new capacity is coming on line, which should rebalance the market in 2019.
Covestro AG is a global supplier of high-tech polymer materials and application solutions developed for these materials. Co. produces precursors for polyurethane foams and the high-performance plastic polycarbonate in addition to raw materials for coatings, adhesives and sealants as well as specialty products, including high-quality films. Other precursors such as chlorine and by-products like styrene are part of Co.'s range of products.
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Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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