As I embark on my last winter break, I reminded myself that I bought the achaion.com url in December 2021. Over the last two years, I invested in and wrote about a variety of companies. The best investment was the time I put into myself by learning, traveling, and embracing opportunities. In my last semester of college, I have decided to double down on that investment before working life begins. Orion Engineered Carbons has a management team that continues to invest and double down on themselves by buying their own stock on the open market.
Materials Companies
Before we get started, Orion is a materials company, which means it produces materials that go into the production of other products. Materials companies can be extremely cyclical given that end market demand can rise and fall based on several factors: macroeconomic drivers, material availability, etc… As a result, the stocks themselves can be more volatile.
Famous investors like Peter Lynch believes that people who work in cyclical industries could do well trading stocks related to their industries. Someone who works at a copper company should be better at predicting copper prices than the general investing population, which means this copper professional should have an edge in buying and selling copper related companies. In reality, there are CEOs who do this and will trade their competitors stocks in their personal portfolios because they have that built-in industry know-how.
This pushed me out of looking at materials companies for a long time because I do not have the time to develop those kinds of edges. However…
…after conducting a Russell 2000 materials screen, I came across a company that looked okay when it came to fundamentals, seemed to be in a revenue trough, and had its own CEO and other c-suiters buying stock.
Today, we are going to ask two questions:
- Why is the CEO buying their own stock?
- Is the CEO making the right decision to invest in themselves?
The first question has an easy answer: because the CEO thinks their stock will rise.
The second question is tougher, but here is a thought: shouldn’t the CEO of a materials company have a better-than-general-public understanding of the future of their industry, company, and stock price? Before we follow blindly, let’s learn about the company and the cyclical story.
I may be biased, but I like people who invest in themselves.
Orion Engineered Carbons (OEC)
Key Financials (as of 12/18/2023)
- Market Cap: $1,522.5 mm
- Enterprise Value: $2,382.7 mm
- P/E: 14.2x
- EV/EBITDA: 7.0x
- Current Stock Price: $26
Orion Engineered Carbons S. A. (“Orion”, “OEC”, or “the Company”) is one of the largest global manufacturers of carbon black. OEC develops its carbon black with bespoke physical properties to fit its customers’ needs. Carbon black is a powdered version of carbon, which is extracted from the thermal decomposition of heavy petroleum raw materials. These are byproducts of oil production (ethylene cracking and coal tar).
The primary use for carbon black is as an input in rubber, electrical equipment, printer ink, plastics, and battery production. The extreme-dark pigments absorb heat away from functional components to extend device lifetimes. Every tire, TV, phone, cartridge of black ink, and piece of black clothing has carbon black infused in it.
OEC reports in two segments: “Rubber Carbon Black” or “Rubber” and “Specialty Carbon Black” or “Specialty”. In 2022, Rubber represented 70% of revenue, and Specialty represented 30%. Rubber covers carbon black used in the reinforcement of rubber polymers, and Specialty includes everything else.
Orion owns 14 factories in Europe, North-South America, South Africa, and Asia and participates in one joint-venture in Germany. The Company conducts R&D in labs in Cologne, Germany; Carlstadt, New Jersey; Shanghai, China; and Yeosu, South Korea. Its headquarters are in Luxembourg, and its principal executive office is in Spring, Texas.
Customers engage in short (usually less than three months) and long term (12+ months) contract agreements. Long term contracts possess pricing adjustments based on indexed raw material and electricity costs. Whereas, short term contracts are not connected to carbon black oil market prices. Pricing adjustments are either periodic or quarterly. The adjustments have allowed the Company to decrease the impact of oil price fluctuations on margins. However, large swings in prices can still have a sizable effect. Around 70% of global volumes are through long term contracts for Orion.
History
Carbon Black Industry
Carbon Black use cases have been around for centuries. In ancient China and Egypt, oil lamps, cooled surfaces, and leftover soot led to the first carbon black, which was then used as black pigment for painting and writing. After the Romans began using pine-resin for carbon black feedstock, the Black Forest region in Germany became the epicenter of the industry. During the Industrial Revolution, the abundant availability of coal tar led to its use in the production of carbon black.
In the early 1800s, the rubber industry began to use carbon black after discovering that its reinforcing properties allowed tires to last longer.
Orion
Beginning in 1862, August Wegelin founded a carbon black plant in Cologne, Germany. After Degussa Engineered Carbons acquired August Wegelin AG in the 1930s, Degussa built out its global footprint by purchasing carbon black production facilities around the world. In 2007, Evonik Industries, a German specialty chemicals company, bought Degussa Engineered Carbons.
In 2011, Evonik sold off its carbon black segment, which became Orion Engineered Carbons. On July 28, 2014, Orion incorporated and, on July 30, 2014, OEC IPO’d at $18.00 per share.
Corning Painter, CEO
Dan Clem was the head of the Evonik Degussa GmbHs global carbon black business and became the CEO of Orion in 2011 post-divestiture. After his retirement in 2018, he continued to be involved as an advisor and member of the board.
“It is with complete confidence that I transition the role of chief executive to Corning Painter with his deep technical experience in the chemical industry and his outstanding functional competence in global businesses, OEC will be well-positioned to continue its growth as we further penetrate emerging markets and build on the success of our technical and specialty capabilities.”
Dan Clem
Before Corning Painter joined Orion, Painter held a variety of executive positions at Air Products and Chemicals, an industrial gases producer, in the UK, Taiwan, and US. To end his nearly four decade run at Air Products, he ran its $8 billion business as Executive VP of Industrial Gases and Informational Technology. In 1984, he graduated from Carnegie Mellon as a Chemical Engineering major.
During his first earnings call as CEO (Q3 2018), Painter was excited to continue the core carbon black business and deepen its reach through the expansion of additional Specialty end markets while strengthening existing and entering new geographic regions. On top of strategy, he was adamant about the role of the CEO as a capital allocator through stable dividends and share buybacks. Painter placed an emphasis on the North American and Chinese markets and the potential for carbon black in batteries.
Fundamentals Since 2018
2019-2020 (recession and COVID 19 outbreak)
- carbon black market experienced a downturn from poor economic conditions pre-covid
- revenue contracted but guidance was met
- experienced the highs and lows of Covid bust and boom
- expanded leverage to nearly 4.5x Net Debt/EBITDA to continue operations through covid
- Paused dividend after outbreak
- Ended up growing YoY in Q4 2020
2021-2022 (boom)
- reinstated dividend in Q4 2021
- began deleveraging
- expansion projects and strong performance in higher margin specialty black products led to return to growth
Today
Carbon Black Industry
In 2023, the carbon black industry is set to grow to $27 billion and $38 billion by 2030, which represents a 4.8% CAGR. Growth in the automotive and transportation industry has boosted the consumption of tires. Consumers preferences towards black-colored products is increasing the demand for black inks, polymers, and clothing. China is the largest consumer and producer of carbon black due to increased tire and plastic usage.
On the macro side of things, the end markets that carbon black manufacture service are heavily dependent on production and the greater macroeconomic landscape. When people want to buy new homes, transportation companies will make more lumber, steel, and infrastructure shipments. The more trucks drive, the more they will need tires replaced. If more people are buying general stuff, then more of that stuff needs to be produced on conveyer belts. In essence, carbon black should be tied to economic growth.
After the early signals of a potential Federal Reserve pivot in 2024, better economic times should be in front of us, which is why OEC has had a run-up in stock price over the last few weeks. In better economic times, OEC should be a winner.
That being said, it is difficult to bet on the current macro because we do not own a crystal ball. There could be things that break before we get to rate cuts. Historically, major rate cuts take place when the economy is confronted with a bad recession.
What can we do then? Since there are only three global players, we can look at Orion’s ability to develop new products, expand capacity, and showcase dependability.
Orion in Q3 2023
In nine-months of 2023, the Company has almost delivered more adjusted-EBITDA than all of 2021. Since the fourth quarter of 2022, it bought back nearly 5% of its shares outstanding. OEC opened a greenfield facility in China, which is strong for growth in the long run and harmful to margins in the short run.
Specialty demand contracted with the broader downturn in manufacturing. However, the Company announced the launch of a new lithium-battery focused product for electrical vehicles, consumer application, and energy storage systems. In May 2023, Orion expanded Specialty operations in Germany.
In Rubber, the Company should benefit from an EU ban on Russian Carbon Black, which begins in the middle of 2024.
Despite destocking challenges that will remain into second half of 2024, Painter raised guidance, announced a third consecutive year of earnings growth, and discussed ramping up multiple facilities.
The key to Orion’s success will be to continue a healthy balance of investing in expansion, returning capital to share holders, and focus on the core business: manufacturing carbon black and selling at optimal prices.
Summary and Answer to Question #2?
Context
| Date | Number of Shares | Share Price |
| March 3, 2020 | 35,000 | $13.87 |
| May 22, 2020 | 50,000 | $9.11 |
| September 4, 2020 | 50,000 | $12.70 |
| August 16, 2021 | 30,000 | $17.20 |
| November 30, 2021 | 30,000 | $17.39 |
| February 24, 2022 | 40,000 | $15.19 |
| August 22, 2022 | 30,000 | $16.77 |
| August 18, 2023 | 15,000 | $21.59 |
| Total/Average: | 280,000 | $14.46 |
In total, since 2020, Painter has bought 280,000 shares of OEC at an average price of $14.46, which equates to a nearly $4.0 million investment out of his own pocket. Additionally, he has made zero open market sales. In 2020, 2021, and 2022, Painter made $5.3 million in cash salary ($13.4 in estimated total comp including restricted stock), which means he has a large share of his personal earnings tied to the success of OEC stock.
Since 2020, other OEC executives have made 15 insider purchases and only two sales.
Note: Air Products’ CEO buys APD relatively consistently, too.
Closing
As of December 18, 2023, OEC is trading at $26 per share, which means that Corning Painter has almost doubled his $4.0 million investment. In that sense, yes, he has made the right personal decision.
On the company leadership side, one of the best signals for an investor is to see management buying their own stock because it puts a monetary incentive to align with shareholder values (my values). Moreover, Painter will continue to attract investor interest in a small cap cyclical because of his insider buying.
Overall, Orion Engineered Carbons is an industry leader with several simple growth stories: expanding manufacturing capacity, developing new products, and tailwinds in carbon black demand. Since Painter has become CEO, it seems like he has maintained a great balance between capex and returning excess free cash flow to shareholders while making strides as a leader in specialty and rubber carbon black. With a solid management team that continues to buy its own stock, it makes me more confident in monitoring this uber-cyclical name.
That being said, this is not the most overlooked stock in the world. There are environmental, geopolitical, and macro risks associated with the Company. In addition, it is trading near early 2019 levels (highs). However, I think it is due to Corning Painter finally having the opportunity to take advantage of a traditional cyclical upswing after having to navigate a recession and a tricky recovery.
Continue the Research
In this post, I did not get too nitty gritty on fundamentals, multiple activity, and all the other stuff I usually look at for a Warrior Stock.
I would take a deeper dive on OEC’s segments because management continues to talk about the potential in battery, which is a very small slice of the revenue pie. Whereas, poylmers and coatings take up a larger chunk.
Additionally, I want to learn more about the supply and demand dynamics for rubber. Is global tire and rubber demand going to outpace carbon black capacity? If that is the case, it makes Orion an extremely interesting prospect (and explains why Mr. Painter has bought so much OEC…).
If you have more questions or want to talk all things OEC, do not hesitate to reach out on twitter, instagram, or shoot me a text.
Employ your curiosity.
-Maximus Beach
Learn more about Maximus Beach’s background here.
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