Negative Near-Term on Georgia Gulf
Georgia Gulf Corp. (GGC) overpaid for Royal Plastics, a supplier of housing products. The acquisition was entirely financed with debt, and the company is in danger of violating debt covenants. The remaining product lines of the company are suffering from over capacity. Rising feedstock and energy costs, coupled with weak demand for the company's products aggravated net losses in the first quarter of 2008.
Going forward, demand for GGC's products is expected to remain weak due to the downturn in the US housing and auto markets, as the company's end markets are primarily housing related. As a result, we have a Sell rating with a target of $3.50. Until housing market conditions improve, it will be difficult for Georgia Gulf to achieve profitability growth and debt reduction.
The PVC and phenol business segments are under pressure due to capacity increases. Prices for Natural gas increased more than 25% in the first quarter negating the impact of product price increases. This compressed margins for the quarter. Natural gas prices are expected to rise further. On June 10, Fitch Ratings downgraded the ratings of Georgia Gulf. These ratings affect approximately $1.5 billion of debt. The Ratings Outlook remains negative.
Celanese Expands into Asia
Celanese Corp. (CE) is in the midst of a major profit improvement program. It has a strong growth strategy with development in Asia as a key factor and there is $400 million of free cash flow per year, primarily focused on share repurchase.
Higher pricing on continued strong global demand for Acetyl Intermediates products, positive currency impacts, growth in Asia supported by the company's new acetic acid unit in Nanjing, China, as well as sales of Industrial Specialties from the acquired Acetate Products Limited are driving the company's sales. In addition, the company has leadership positions in oligopolistic markets that have solid fundamentals.
The company raised its EBITDA profit improvement by 2010 to $350-$400 million. About $100-$150 million of this improvement will be from low-cost Asian expansions. Total revenues in 2010 are expected to be $600-$800 million. As part of the share buyback program, the company has already repurchased $60 million of its outstanding common shares.
Currently, Celanese is valued at 12.7x our 2008 estimate of $3.94. We rate the shares a Buy with a target of $56.00. This is 14.2x our 2008 estimate
Future Bright for First Solar
First Solar, Inc. (FSLR) relies on its proprietary thin-film semiconductor technology to design, manufacture and sell solar electric power modules. Hence, the firm managed to avert a silicon shortage, which ravaged the bottom lines of other solar peers. As a result, the company was able to register consistent improvement in its bottom line. So, we maintain our Buy recommendation on FSLR with a six-month target price of $333. Price appreciation to our near-term valuation target represents 15.6% upside potential.
The company plans to expand its manufacturing capacity to 23 production lines and an annual global manufacturing capacity of 1,012MW by the end of 2009. FSLR expects revenue in the current fiscal to be between $900 million and $950 million. The long-term supply contracts in the aggregate allow for approximately Euro 4.5 billion in sales from 2008 to 2012 for the sale of a total of 3.2GW of solar modules.
