Market Cap (EUR Mil) 9,660
52-Week High (EUR) 121.05
52-Week Low (EUR) 97.20
52-Week Total Return % 6.9
YTD Total Return % 6.5
Last Fiscal Year End 31 Dec 2012
5-Yr Forward Revenue CAGR % 0.8
5-Yr Forward EPS CAGR % 1.7
Price/Fair Value 0.99
2011 2012
2013(E) 2014(E)Price/Earnings 7.3 12.7 23.0 16.0
EV/EBITDA 4.6 6.2 8.1 6.4
EV/EBIT 6.1 10.2 16.0 10.5
Free Cash Flow Yield % 4.8 7.3 7.3 5.1
Dividend Yield % 5.2 3.0 2.3 3.0
2011 2012
2013(E) 2014(E)Revenue 12,535 12,831 11,273 11,987
Revenue YoY % 110.4 2.4 -12.1 6.3
EBIT 1,398 1,228 809 1,240
EBIT YoY % 144.8 -12.2 -34.1 53.3
Net Income, Adjusted 709 710 406 586
Net Income YoY % -67.5 0.2 -42.9 44.5
Diluted EPS 8.69 8.59 4.95 7.15
Diluted EPS YoY % -67.5 -1.2 -42.4 44.5
Free Cash Flow -2,197 336 -356 727
Free Cash Flow YoY % -134.9 -115.3 -206.0 -304.3
Chemlogics will increase exposure to the rapidly growing U.S.
shale oil and gas chemicals market.
Todd Wenning Equity Analyst
todd.wenning@morningstar.com +1 (312) 696-6107
Research as of 13 Nov 2013 Estimates as of 13 Nov 2013 Pricing data through 30 Dec 2013 Rating updated as of 30 Dec 2013
Investment Thesis 01 Aug 2013
Through acquisitions, divestitures, and joint ventures, Solvay has reduced its reliance on cyclical end markets and increased its exposure to higher-growth emerging markets. Case in point is Solvay's move in May 2013 to enter into a joint venture with INEOS to create the world's second-largest polyvinyl chloride (PVC) producer. PVC demand plummeted after the housing collapse in 2007 and remains well below pre-crash levels. Compounding the problem has been chronic European overcapacity in PVC production. Taken together, PVC has been a major headwind for Solvay's plastics business in recent years. The announced joint venture should improve Solvay's plastics profitability over the medium term before INEOS fully buys out Solvay's stake in four to six years. We think this is a graceful way to exit a challenging PVC production business and will allow Solvay to turn its attention to higher-margin and less-cyclical specialty chemical production.
Solvay benefits from being vertically integrated in limestone, salt brine, and fluorspar, which are used in the production of soda ash, caustic soda, chlorine, hydrogen, and hydrogen peroxide. Solvay also has captive sources of energy with cogeneration units, which have for years kept the company's energy costs under control.
These factors contribute to Solvay's status as a lower-cost producer of globally consumed chemicals, but the company still needs to realize high capacity utilization rates in order to generate high returns on capital from these assets.
The company aims to achieve EUR 3 billion in EBITDA excluding nonrecurring items by 2016. We do not think this is achievable on an organic basis without a surprisingly strong economic recovery in Europe. Over the medium term, we expect slow but steady demand growth for products designed for consumer end uses like cosmetics and food flavorings. We expect demand to improve for Solvay's cyclically sensitive products over the next three years, driven by specialty polymers used in oil and gas, rare earth systems used in electronics, and soda ash used in industrial glass production.
Solvay is a global leader in essential and specialty chemical production. In recent years, the company has jettisoned noncore product lines, including its pharmaceutical division, and consolidated its position in soda ash, hydrogen peroxide, and sodium bicarbonate. It is the world's largest provider of soda ash, which is used primarily in glass manufacturing. Ninety percent of its 2012 sales were in businesses in which it held a top-three market position.
Profile Vital Statistics
Valuation Summary and Forecasts
Financial Summary and Forecasts
The primary analyst covering this company does not own its stock.
Currency amounts expressed with "$" are in U.S. dollars (USD) unless otherwise denoted.
Historical/forecast data sources are Morningstar Estimates and may reflect adjustments.
Analyst Note: We account for hybrid bond as debt rather than equity
(EUR Mil)
Contents
Investment Thesis Morningstar Analysis
Analyst Note
Valuation, Growth and Profitability Scenario Analysis
Economic Moat Moat Trend Bulls Say/Bears Say Credit Analysis
Financial Health Capital Structure Enterprise Risk Management & Ownership Analyst Note Archive Additional Information Morningstar Analyst Forecasts Comparable Company Analysis Methodology for Valuing Companies
Fiscal Year:
Fiscal Year:
1
- 2 2 2 2 3
4 4 4 6 8 - 10 14 16
Morningstar Analysis
Valuation, Growth and Profitability 13 Nov 2013 Our fair value estimate is EUR 115 per share, which represents a 2013 price/earnings ratio of 23 times and an EV/EBITDA multiple of 6.8 times. Our model assumes a modest recovery in the European economy through 2017 with revenue growing 2.7% from 2014 through 2017, and we expect the average operating margin over our forecast period to be near 10.5%.
Scenario Analysis
In our bull-case scenario, we think Solvay is worth EUR 170 per share. In this case, we expect revenue to grow at 4.2%
annualized from 2014 through 2017, fueled by sharper recovery in the European economy than we assume in the base case. We expect the average operating margin to be near 13.5% in this scenario.
For the bear-case scenario, we think Solvay is worth EUR 67 per share. In this scenario, we expect revenue to grow near 1% annualized from 2014 through 2017 due mainly to a weaker-than-expect European economic recovery. We expect the average operating margin in the bear case to approximate 7.5%.
Economic Moat
Despite Solvay's vertical integration in some of its key chemical products, we do not think Solvay possesses an economic moat. We do not think that vertical integration necessarily translates into an economic moat, even if it does reduce input cost volatility. For example, considering the capital intensity of upstream chemical production, the benefits of not having to pay market prices for inputs is offset by the capital cost of owning the upstream assets.
The company's move to focus on higher-margin specialty chemicals and become less reliant on cyclical end markets is common among diversified chemical companies. Given the intense competition in the global chemicals industry, we think it's difficult for a participant to create and maintain
sustainable competitive advantages. Unless there are significant switching costs associated with the higher-margin products, they should ultimately be competed away. Solvay has spent about 2% of sales on research and development, on average, since it shed its pharmaceutical business, which is below the specialty chemicals industry average. This relatively low level of R&D spending should make it more difficult for Solvay to stay ahead of the industry innovation curve and carve out an economic moat based on switching costs.
Another factor working against Solvay is heightened competition from Asian producers that can operate with razor-thin margins. U.S. producers (including Solvay's North American operation) are also formidable low-cost producers, which in turn pressure Solvay's large European production base.
Moat Trend
We believe Solvay's moat trend is stable. We're encouraged
by the company's recent step to begin to exit its
underperforming PVC business as it will reduce exposure to
cyclical industrial end markets and to Western Europe. Over
the intermediate term, we expect Solvay will fully compete
with other diversified global chemical companies, but will
ultimately neither gain an advantage over nor concede any
ground to its peers. We forecast that longer-term growth at
Solvay will approximate the regional GDP growth rates in
which the company operates.
Bulls Say/Bears Say
Bulls Say Bears Say
3 The reshuffling of Solvay's business lines smartly reduces the company's exposure to cyclical end markets and reduces its dependence on the European economy.
3 Solvay's PVC joint venture is a graceful exit from a struggling business line.
3 Solvay's dominant position in a number of important chemicals like hydrogen peroxide, sodium bicarbonate, and soda ash should help it obtain a low-cost production advantage.
3 Solvay is focused on innovation, but many of its end products are mature, undifferentiated commodities.
3 Solvay may have reduced its cyclical operations at the wrong time and it will thus be left behind in a broad economic rebound.
3 Solvay operates in a highly competitive marketplace.
It has very limited pricing power as it is primarily a
price taker.
2013(E) 2014(E) 2015(E) 2016(E) 2017(E)
Cash and Equivalents (beginning of period) 1,768 2,005 2,156 2,492 2,970
Adjusted Available Cash Flow -555 363 548 690 741
Total Cash Available before Debt Service 1,213 2,368 2,704 3,182 3,711
Principal Payments -108 -225 -225 -225 —
Interest Payments -180 -222 -222 -222 -222
Other Cash Obligations and Commitments — — — — —
Total Cash Obligations and Commitments -288 -447 -447 -447 -222
EUR Millions
% of Commitments
Beginning Cash Balance 1,768 95.5
Sum of 5-Year Adjusted Free Cash Flow 1,786 96.4
Sum of Cash and 5-Year Cash Generation 3,554 191.9
Revolver Availability — —
Asset Adjusted Borrowings (Repayment) — —
Sum of Cash, 5-Year Cash Generation, Revolver and Adjustments 3,554 191.9
Sum of 5-Year Cash Commitments -1,852 —
SOLB Sector Universe
Business Risk 5
Cash Flow Cushion 5 — —
Solvency Score 6 — —
Distance to Default 5 — —
Credit Rating — — —
Five Year Adjusted Cash Flow Forecast (EUR Mil)
Credit Analysis
Cumulative Annual Cash Flow Cushion
Cash Flow Cushion Possible Liquidity Need
Adjusted Cash Flow Summary
Credit Rating Pillars Peer Group Comparison
Source: Morningstar Estimates
Note: Scoring is on a scale 1-10, 1 being Best, 10 being Worst
Financial Health & Capital Structure
We think Solvay is in fair financial health. Solvay generally covers each euro of interest expense with EUR 12 of EBITDA and EUR 8 of operating profit. Solvay is also a consistent generator of free cash flow, which should allow the company to continue to fulfill its "stable and growing" dividend policy, make strategic acquisitions, and satisfy bondholders.
Over the past seven years, Solvay had an average debt/capital ratio of 34%, which we think is a comfortable level that allows the company enough financial flexibility to seize upon attractive opportunities over the business cycle. Its EUR 6.6 billion acquisition of the highly-leveraged Rhodia weakened Solvay's leverage ratios, but we think the company will continue to reduce its overall leverage toward historical levels below 2.5 times debt/EBITDA. With the Solvay family descendants owning about 30% of the equity, we expect the company will maintain a relatively conservative balance sheet and modestly increase its dividend each year.
Enterprise Risk
We are also maintaining our high uncertainty rating given
the company's significant exposure to volatile energy and
input costs, and integration of the Chemlogics acquisition,
as well as its ongoing restructurings. A strategy of cutting
loose noncore, cyclical, and low-margin businesses may
reduce business volatility, but it does not necessarily
enhance shareholder value. In the coming years, Solvay will
need to show that its new angle as an essential and
specialty chemicals producer can accrue value to
shareholders and was worth all the reshuffling. Solvay is
also naturally exposed to volatile energy and raw materials
prices and sudden sharp movements in key input costs can
negatively impact profitability. Over the last decade, Solvay
has been the subject of a number of anti-trust and
environmental suits in Europe. The most common result of
these suits has been a modest fine paid by Solvay. A major
Credit Analysis
spill, leak, or damage from chemical plants or outsized fine
from regulators could have a material impact on near-term
results. Solvay is also responsible for liabilities up to EUR
500 million for the pharmaceutical business it sold to Abbott
Laboratories in 2010. Specifically, this includes the potential
liability from any lawsuits regarding drugs previously
manufactured by Solvay.
Name Position Shares Held Report Date* InsiderActivity
NA NA NA NA NA
Top Owners % of Shares
Held % of Fund Assets Change
(k) Portfolio Date
M&G Global Dividend 1.87 1.93 — 30 Sep 2013
Vanguard Total Intl Stock Idx Fund 0.35 0.04 5 30 Nov 2013
JPMorgan International Value Fund 0.33 1.33 15 30 Nov 2013
L&G Pension PMC Europe(Ex UK) Inx Acc 0.36 0.15 48 31 Mar 2013
iShares MSCI EAFE (AU) 0.29 0.07 — 27 Dec 2013
Concentrated Holders
KBC Multi Track Belgium 0.06 8.34 -1 31 Oct 2013
ING (B) Invest Belgium Hi Div 0.07 7.75 — 30 Sep 2013
ING (B) Invest Belgium 0.08 7.74 — 30 Sep 2013
Adenium Quant Europe Market Neutral — 6.80 — 31 Dec 2012
BNP Paribas B Fd I Eq Belgium 0.13 6.38 — 31 Oct 2013
Top 5 Buyers % of Shares
Held % of Fund Assets
Shares Bought/
Sold (k) Portfolio Date
Government Pension Fund of Norway - Global 1.12 0.01 147 31 Dec 2011
Lyxor International Asset Management 0.20 0.30 131 30 Nov 2013
Putnam Investment Management, LLC 0.35 0.38 96 30 Sep 2013
Amundi 0.45 0.40 86 31 Aug 2013
TIAA-CREF Investment Management LLC 0.20 0.02 80 31 Oct 2013
Top 5 Sellers
St. James's Place Unit Trust Group Ltd 0.14 0.47 -202 30 Sep 2013
Principal Management Corp 0.01 0.03 -129 30 Nov 2013
Groupama Asset Management 0.01 0.33 -127 30 Jun 2013
Crédit Agricole Luxembourg 0.01 0.42 -38 30 Jun 2013
Legal & General(Unit Trust Managers)Ltd. 0.02 0.01 -35 30 Nov 2012
Management 13 Nov 2013
Management & Ownership
Management Activity
Fund Ownership
Institutional Transactions
*Represents the date on which the owner’s name, position, and common shares held were reported by the holder or issuer.
We award Solvay a Standard stewardship rating, as we think the company's latest capital allocation decisions--specifically the PVC joint venture and the Chemlogics acquisition--won't move the company meaningfully closer to establishing a narrow economic moat and will ultimately have a neutral impact on shareholder value. At 10.7 times EBITDA (8.7 times including the present value of a tax benefit), we think Solvay paid a full price for Chemlogics. While this isn't an excessive multiple for a growing specialty chemicals company with 20%-plus EBITDA margins in today's market, oil and gas chemicals have been on a tear over the last few years, and the growth potential of this niche market is well known and likely priced in. As such, we believe the already optimistic industry outlooks for U.S. shale oil and gas production and drilling will need to materialize in order to justify the price paid by Solvay.
A year after acquiring Rhodia, Solvay's then-CEO Christian Jourquin announced his retirement effective May 2012.
Taking Jourquin's place was Jean-Pierre Clamadieu, who became CEO of Solvay after serving as Rhodia's CEO since 2003. We do not consider Jourquin's departure to be a negative, as Jourquin spent his entire 40-plus year career working at Solvay, and it was assumed shortly after the deal was announced that Clamadieu would succeed Jourquin upon retirement.
In July, the company announced that CFO Bernard de Laguiche would be stepping down from his role to pursue personal interests in Brazil. We believe Laguiche headed up some wise capital allocation strategies during his seven year role as Solvay CFO, including the sale of the pharmaceutical business in 2010, the Rhodia acquisition in 2011, and the planned joint venture with Ineos that could provide Solvay with a graceful exit from the PVC business.
Taking his place will be Karim Hajjar, who was most recently
director of finance and planning at Imperial Tobacco, but
has financial experience in the chemicals business, having
served as CFO of Tarmac Group and deputy CFO of Shell Chemicals earlier in his career.
More than half of executive committee member
compensation is fixed, which we think financially shelters
management from downside risks while enabling them to
fully participate in any upside. This could lead to undue risk
taking, but we expect the conservative Solvay shareholders
will serve as a check on any aggressive M&A activity. Over
the past thirty years, Solvay has increased its dividend at
an average pace of 5% per year and has a "stable to
increasing" dividend policy that should keep the major
shareholders content. On balance, we think there are
positives and negatives regarding Solvay stewardship, and
that the two sides ultimately offset each other.
Analyst Notes
Solvay's 3Q Plagued by Lower Guar Prices; Improving Margins in Advanced Materials Is Encouraging 28 Oct 2013
After reviewing Solvay's third-quarter results, we are maintaining our fair value estimate of EUR 115 per share as well as our no-moat rating. There are a number of moving parts at Solvay at the moment, as the company prepares to close on its Chemlogics acquisition in the fourth quarter;
the Chlorovinyls joint venture is set to commence pending European Commission approval and the business is now treated as a discontinued operation. We believe both capital allocation decisions were reasonable and expect both deals to proceed as planned.
On a year-over-year basis, companywide volumes were flat and prices were down 4%, while adverse foreign exchange effects had an additional negative 5% impact on the top line. Lower guar prices were a major headwind in the important Novecare business, resulting in a year-over-year net sales and REBITDA decline of 15% and 52%, respectively, in the Consumer Chemicals segment. Solvay has little pricing power in this segment, which contributes to our no-moat rating for the broader company. On the bright side, the Advanced Materials and Performance Chemicals segments posted REBITDA margin expansion despite declining year-over-year sales. The former was supported by strong demand in the Silica cluster, which realized 16%
volume growth compared to the prior year and record margins. Performance Chemicals' decent results were driven by the Acetow cluster (21% of segment sales), which was able to pass on higher prices to customers despite stable demand.
Looking forward to the rest of 2013 and into 2014, we expect the margins in Consumer Chemicals to remain pressured as lower guar prices should continue to be a near-term negative. In the medium term we forecast segment REBITDA margins to recover toward 20% from the 16% realized over
the last 12 months. We also expect better top-line growth in Advanced Materials and Performance Chemicals segments as European industrial demand slowly improves.
Solvay Agrees to Buy Chemlogics for $1.35 Billion; No Change to Our Fair Value Estimate 08 Oct 2013 On Monday, Belgian chemical company Solvay agreed to buy U.S.-based Chemlogics for $1.35 billion, financed with cash on hand and a planned EUR 1 billion hybrid bond issuance. The proposed deal would meaningfully increase Solvay's exposure to the rapidly growing U.S. shale oil and gas chemicals market. Strategically, we believe the deal is a nice fit as Chemlogics' chemicals, which reduce friction in the drilling process and reduce water use, among other things, should complement Solvay's Novecare surfactants that currently serve this end market. The deal should also have some top-line synergies as Solvay gains access to more small- and midsize oilfield service customers to which it might cross-sell existing offerings, and allow Solvay to introduce Chemlogics offerings to its current list of large oilfield service customers.
That said, at 10.7 times trailing 12-month EBITDA (8.7 times including present value of a tax benefit), we think Solvay paid a full price for Chemlogics. While this isn't an excessive multiple for a growing specialty chemicals company with 20%-plus EBITDA margins in today's market, oil and gas chemicals have been on a tear over the last few years and the growth potential of this niche market is well-known and likely priced in here. As such, we believe the already- optimistic industry outlooks for U.S. shale oil and gas production and drilling will need to materialize in order to justify the price paid by Solvay.
Further, the sizable acquisition will be a "trial by fire" for
new CFO Karim Hajjar, who assumed the role just a week
ago, so there is some potential for integration challenges.
Analyst Notes
All things considered, we believe this deal will have a net neutral effect on shareholder value creation and we do not expect a material change to our current EUR 115 per share fair value estimate.
Lower Guar Prices Weigh on Solvay's Second Quarter;
Firm Announces Change of CFO 31 Jul 2013
Solvay's second-quarter results were broadly disappointing, with each segment reporting year-over-year sales declines.
Further, only four subsegments (Coatis, Silica, Acetow, and Emerging Biochemicals) posted year-over-year sales growth; together, this group accounted for just 17% of total sales in the quarter. EBITDA before restructuring costs fell 14% year over year. After reviewing results, we are reducing our forecast for full-year earnings per share, but we're maintaining our EUR 115 per share fair value estimate as we expect better margins in the medium term. For the back half of the year, we expect soft demand from European sources to persist, but we expect that Solvay would be a significant beneficiary of even a modest European economic recovery--particularly a rebound in European construction.
Companywide, volumes and prices were down 1% and 2%, respectively. Lower guar prices were the main cause of the 9% year-over-year decline in Novecare sales, but guar usage in the cosmetics, detergents, agrochemicals, and oil end- markets remains stable. Essential Chemicals sales were 4%
lower year over year because of weak European demand for flat glass, which is a major end market for Solvay's soda ash production. Solvay had EUR 97 million in restructuring charges related mainly to its soda ash business. We think the frequency of Solvay's restructuring efforts is indicative of the business's inability to defend margins, which we believe supports our thesis that Solvay lacks an economic moat.
The company also announced the departure of CFO Bernard
de Laguiche, who had been with Solvay for 26 years and
served as CFO for the past seven years. We believe Laguiche
was a good capital allocator for Solvay, in particular his
oversight of selling company's pharmaceutical business in
2010 and acquiring Rhodia in 2011. Both transactions were
timely and fairly priced, in our opinion. Laguiche will be
replaced by Karim Hajjar who was most recently director of
finance and planning at Imperial Tobacco; Hajjar does have
financial experience in the chemicals business, having
served as CFO of Tarmac Group and deputy CFO of Shell
Chemicals before joining Imperial Tobacco.
Growth (% YoY)
3-Year
Hist. CAGR 2010 2011 2012
2013 20145-Year Proj. CAGR
Revenue 31.1 4.7 110.4 2.4 -12.1 6.3 0.8
EBIT 58.1 83.6 144.8 -12.2 -34.1 53.3 4.5
EBITDA 35.8 46.0 57.3 9.1 -20.7 26.9 2.4
Net Income 14.2 357.9 -67.5 0.2 -42.9 44.5 1.5
Diluted EPS 14.0 361.8 -67.5 -1.2 -42.4 44.5 1.7
Earnings Before Interest, after Tax 7.9 386.7 -60.9 -33.9 21.4 43.2 15.4
Free Cash Flow -10.4 — -134.9 -115.3 -206.0 -304.3 28.5
Profitability
3-Year
Hist. Avg 2010 2011 2012
2013 20145-Year Proj. Avg
Operating Margin % 10.1 9.6 11.2 9.6 7.2 10.4 10.4
EBITDA Margin % 16.8 19.8 14.8 15.8 14.2 17.0 16.5
Net Margin % 15.9 36.6 5.7 5.5 3.6 4.9 5.1
Free Cash Flow Margin % 30.3 NM -17.5 2.6 -3.2 6.1 5.6
ROIC % 12.9 24.4 8.4 6.0 6.4 8.8 8.6
Adjusted ROIC % 10.6 11.7 11.7 8.4 9.0 12.4 11.9
Return on Assets % 7.0 13.5 4.4 3.1 2.6 3.3 3.4
Return on Equity % 17.8 32.2 11.7 9.5 7.8 9.8 9.8
Leverage
3-Year
Hist. Avg 2010 2011 2012
2013 20145-Year Proj. Avg
Debt/Capital 0.36 0.30 0.40 0.37 0.42 0.41 0.39
Total Debt/EBITDA 2.11 2.28 2.25 1.81 2.89 2.28 2.29
EBITDA/Interest Expense 11.43 10.16 11.10 13.05 8.90 9.15 9.57
2011 2012
2013(E) 2014(E)Price/Fair Value 0.65 1.12 — —
Price/Earnings 7.3 12.7 23.0 16.0
EV/EBITDA 4.6 6.2 8.1 6.4
EV/EBIT 6.1 10.2 16.0 10.5
Free Cash Flow Yield % 4.8 7.3 7.3 5.1
Dividend Yield % 5.2 3.0 2.3 3.0
Cost of Equity % 12.0
Pre-Tax Cost of Debt % 5.5
Weighted Average Cost of Capital % 9.6
Long-Run Tax Rate % 29.4
Stage II EBI Growth Rate % 6.4
Stage II Investment Rate % 53.3
Perpetuity Year 10
EUR Mil Firm Value (%) Per Share
Value
Present Value Stage I 2,525 24.1 29.87
Present Value Stage II 1,447 13.8 17.12
Present Value Stage III 6,501 62.1 76.92
Total Firm Value 10,473 100.0 123.91
Cash and Equivalents 2,193 — 25.95
Debt -3,652 — -43.21
Preferred Stock — — —
Other Adjustments -20 — -0.24
Equity Value 8,994 — 106.41
Projected Diluted Shares 85
Fair Value per Share —
Morningstar Analyst Forecasts
Forecast Fiscal Year Ends in December
Financial Summary and Forecasts
Valuation Summary and Forecasts
Key Valuation Drivers
Discounted Cash Flow Valuation
Additional estimates and scenarios available for download at http://select.morningstar.com.
The data in the table above represent base-case forecasts in the company’s reporting currency as of the beginning of the current year. Our fair value estimate may differ from the equity value per share shown above due to our time value of money adjustment and in cases where probability-weighted scenario analysis is performed.
(EUR)
2010 2011 2012
2013 2014Revenue 5,959 12,535 12,831 11,273 11,987
Cost of Goods Sold 4,833 9,838 10,270 9,244 9,589
Gross Profit 1,126 2,697 2,561 2,029 2,397
Selling, General & Administrative Expenses 482 1,109 1,131 251 174
Research & Development 125 216 261 225 240
Other Operating Expense (Income) -52 -26 -59 -50 -50
Depreciation & Amortization (if reported separately) — — — 794 794
Operating Income (ex charges) 571 1,398 1,228 809 1,240
Restructuring & Other Cash Charges 317 -21 -48 -110 -110
Impairment Charges (if reported separately) — — — — —
Other Non-Cash (Income)/Charges — — — — —
Operating Income (incl charges) 254 1,419 1,276 919 1,350
Interest Expense 116 167 155 180 222
Interest Income -62 -164 -202 -20 -160
Pre-Tax Income 76 1,088 919 719 968
Income Tax Expense -21 254 278 194 290
Other After-Tax Cash Gains (Losses) 1,726 -52 -40 — —
Other After-Tax Non-Cash Gains (Losses) — — — — —
(Minority Interest) -47 -57 -17 -36 -36
(Preferred Dividends) — — — — —
Net Income 1,776 725 584 489 641
Weighted Average Diluted Shares Outstanding 81 82 83 82 82
Diluted Earnings Per Share 21.79 8.89 7.06 5.96 7.82
Adjusted Net Income 2,181 709 710 406 586
Diluted Earnings Per Share (Adjusted) 26.76 8.69 8.59 4.95 7.15
Dividends Per Common Share 3.04 3.26 3.36 2.68 3.52
EBITDA 861 1,874 2,070 1,713 2,144
Adjusted EBITDA 1,178 1,853 2,022 1,603 2,034
Morningstar Analyst Forecasts
Income Statement (EUR Mil)
Fiscal Year Ends in December Forecast
2010 2011 2012
2013 2014Cash and Equivalents 1,954 1,943 1,768 2,005 2,156
Investments — 95 425 425 425
Accounts Receivable 1,651 2,311 1,657 1,456 1,548
Inventory 761 1,578 1,422 1,280 1,328
Deferred Tax Assets (Current) 12 43 13 13 13
Other Short Term Assets 4,256 1,393 1,443 1,443 1,443
Current Assets 8,634 7,363 6,728 6,622 6,913
Net Property Plant, and Equipment 3,276 5,641 5,393 6,096 6,192
Goodwill 68 2,717 2,717 2,952 2,952
Other Intangibles 111 1,619 1,462 1,697 1,697
Deferred Tax Assets (Long-Term) 631 796 546 546 546
Other Long-Term Operating Assets 322 420 424 424 424
Long-Term Non-Operating Assets 683 907 1,058 1,058 1,058
Total Assets 13,725 19,463 18,328 19,394 19,781
Accounts Payable 1,428 2,232 1,617 1,455 1,510
Short-Term Debt 148 794 331 331 331
Deferred Tax Liabilities (Current) 62 53 69 69 69
Other Short-Term Liabilities 687 1,528 1,513 1,513 1,513
Current Liabilities 2,325 4,607 3,530 3,368 3,423
Long-Term Debt 2,535 3,374 3,321 4,300 4,300
Deferred Tax Liabilities (Long-Term) 163 712 489 489 489
Other Long-Term Operating Liabilities 1,995 4,122 4,391 4,391 4,391
Long-Term Non-Operating Liabilities — — — — —
Total Liabilities 7,018 12,815 11,731 12,548 12,603
Preferred Stock — — — — —
Common Stock 1,271 1,271 1,271 1,271 1,271
Additional Paid-in Capital — — — — —
Retained Earnings (Deficit) 5,017 4,879 4,882 5,151 5,504
(Treasury Stock) — — — -20 -40
Other Equity — — — — —
Shareholder's Equity 6,288 6,150 6,153 6,402 6,735
Minority Interest 419 498 444 444 444
Total Equity 6,707 6,648 6,597 6,846 7,179
Morningstar Analyst Forecasts
Balance Sheet (EUR Mil)
Fiscal Year Ends in December Forecast
2010 2011 2012
2013 2014Net Income 287 515 1,281 525 677
Depreciation 607 455 794 794 794
Amortization — — — — —
Stock-Based Compensation — — — — —
Impairment of Goodwill — — — — —
Impairment of Other Intangibles — — — — —
Deferred Taxes — — — — —
Other Non-Cash Adjustments 21 -187 -310 — —
(Increase) Decrease in Accounts Receivable -34 303 54 201 -92
(Increase) Decrease in Inventory — — — 142 -48
Change in Other Short-Term Assets -258 -236 -361 117 —
Increase (Decrease) in Accounts Payable — — — -162 54
Change in Other Short-Term Liabilities — — — — —
Cash From Operations 623 850 1,458 1,618 1,386
(Capital Expenditures) -286 -602 -785 -910 -890
Net (Acquisitions), Asset Sales, and Disposals 4,449 -2,969 107 -1,174 —
Net Sales (Purchases) of Investments 110 -171 153 — —
Other Investing Cash Flows -205 60 4 — —
Cash From Investing 4,068 -3,682 -521 -2,084 -890
Common Stock Issuance (or Repurchase) -110 41 114 -20 -20
Common Stock (Dividends) -248 -266 -278 -220 -289
Short-Term Debt Issuance (or Retirement) 22 39 16 — —
Long-Term Debt Issuance (or Retirement) 12 -97 -379 979 —
Other Financing Cash Flows -3,853 3,103 -554 -36 -36
Cash From Financing -4,177 2,820 -1,081 703 -345
Exchange Rates, Discontinued Ops, etc. (net) 25 -1 -22 — —
Net Change in Cash 539 -13 -166 237 151
Morningstar Analyst Forecasts
Cash Flow (EUR Mil)
Fiscal Year Ends in December Forecast
Company/Ticker Price/Fair
Value 2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)Basf SE BAS DEU 1.18 — 14.6 13.8 7.4 8.0 7.9 25.3 22.2 11.1 2.7 2.6 2.5 0.9 1.0 1.1
E.I. du Pont de Nemours & Company 1.13 13.5 16.6 14.5 8.6 10.1 9.1 13.7 22.8 18.0 4.2 5.4 4.4 1.2 1.6 1.5
Eastman Chemical Company EMN USA 1.18 12.6 12.5 11.2 11.7 8.2 7.3 15.8 16.2 13.3 3.6 3.3 2.6 1.3 1.3 1.2
Average 13.1 14.6 13.2 9.2 8.8 8.1 18.3 20.4 14.1 3.5 3.8 3.2 1.1 1.3 1.3
Solvay SA SOLB BE 0.99 12.7 23.0 16.0 6.2 8.1 6.4 13.8 13.6 19.5 1.5 1.5 1.4 0.7 0.9 0.8
Company/Ticker Total Assets
(Mil) 2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)Basf SE BAS DEU 62,726 EUR 11.4 11.6 11.8 12.1 12.3 13.1 19.8 18.9 18.5 7.8 7.7 7.8 3.5 3.3 3.4
E.I. du Pont de Nemours & Company 49,736 USD 13.0 12.3 13.1 16.8 18.1 19.5 30.3 34.7 33.6 5.6 7.3 8.2 3.8 2.7 2.7
Eastman Chemical Company EMN USA 11,619 USD 10.6 10.7 11.3 10.7 11.3 12.2 18.2 28.7 25.8 4.9 7.9 8.4 1.8 1.5 1.6
Average 11.7 11.5 12.1 13.2 13.9 14.9 22.8 27.4 26.0 6.1 7.6 8.1 3.0 2.5 2.6
Solvay SA SOLB BE 18,328 EUR 6.0 6.4 8.8 8.4 9.0 12.4 9.5 7.8 9.8 3.1 2.6 3.3 3.0 2.3 3.0
Company/Ticker Revenue
(Mil) 2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)Basf SE BAS DEU 72,129 EUR -1.9 2.4 -11.6 -21.9 8.8 4.6 -22.1 1.6 5.6 -38.3 -24.1 147.6 13.6 4.0 4.0
E.I. du Pont de Nemours & Company 34,812 USD 3.4 3.7 6.7 -7.6 24.9 13.3 -8.9 16.3 14.7 -293.7 81.0 -55.3 3.9 — 1.7 Eastman Chemical Company EMN USA 8,102 USD 12.9 14.8 5.1 -1.0 71.4 12.9 6.0 17.2 11.8 -322.4 -151.3 17.8 35.5 -6.8 5.0
Average 4.8 7.0 0.1 -10.2 35.0 10.3 -8.3 11.7 10.7 -218.1 -31.5 36.7 17.7 -1.4 3.6
Solvay SA SOLB BE 12,831 EUR 2.4 -12.1 6.3 -12.2 -34.1 53.3 -1.2 -42.4 44.5 -115.3 -206.0 -304.3 3.1 -20.2 31.3
Comparable Company Analysis
These companies are chosen by the analyst and the data are shown by nearest calendar year in descending market capitalization order.
Valuation Analysis
Returns Analysis
Growth Analysis
Price/Earnings EV/EBITDA Price/Free Cash Flow Price/Book Price/Sales
ROIC % Adjusted ROIC % Return on Equity % Return on Assets % Dividend Yield %
Revenue Growth % EBIT Growth % EPS Growth % Free Cash Flow Growth % Dividend/Share Growth %
Last Historical Year
Last Historical Year
Company/Ticker Net Income
(Mil) 2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)Basf SE BAS DEU 4,819 EUR 24.8 25.3 27.5 13.9 13.7 15.8 9.4 9.9 11.8 6.7 6.6 7.8 3.6 4.4 9.8
E.I. du Pont de Nemours & Company 3,127 USD 26.4 28.8 29.6 16.5 18.4 19.3 11.6 14.0 14.9 9.0 10.0 10.6 8.8 7.2 8.6
Eastman Chemical Company EMN USA 804 USD 21.8 26.5 27.9 15.8 21.6 23.0 11.4 17.0 18.2 9.9 10.4 11.1 8.2 8.1 9.4
Average 24.3 26.9 28.3 15.4 17.9 19.4 10.8 13.6 15.0 8.5 9.0 9.8 6.9 6.6 9.3
Solvay SA SOLB BE 710 EUR 20.0 18.0 20.0 15.8 14.2 17.0 9.6 7.2 10.4 5.5 3.6 4.9 5.3 6.3 4.1
Company/Ticker Total Debt
(Mil) 2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)Basf SE BAS DEU 12,798 EUR 52.0 47.2 45.3 34.2 32.1 31.2 13.9 16.5 16.7 1.3 1.3 1.2 2.5 2.4 2.3
E.I. du Pont de Nemours & Company 11,740 USD 116.4 87.7 64.3 53.8 46.7 39.1 12.4 15.7 19.6 2.0 1.5 1.2 4.9 4.4 3.7
Eastman Chemical Company EMN USA 4,783 USD 162.5 128.8 93.3 61.9 56.3 48.3 9.0 10.8 12.5 3.7 2.4 1.9 3.9 3.4 2.8
Average 110.3 87.9 67.6 50.0 45.0 39.5 11.8 14.3 16.3 2.3 1.7 1.4 3.8 3.4 2.9
Solvay SA SOLB BE 3,652 EUR 59.4 72.3 68.8 37.3 42.0 40.8 13.0 8.9 9.2 1.8 2.9 2.3 3.0 3.0 2.9
Company/Ticker Market Cap
(Mil) 2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)2012
2013(E) 2014(E)Basf SE BAS DEU 71,595 EUR 1.79 1.69 4.06 1.64 1.65 1.70 1.07 1.07 1.18 0.40 0.38 0.90 47.6 48.8 48.0
E.I. du Pont de Nemours & Company 59,502 USD 4.55 7.74 8.59 1.56 1.79 1.87 1.02 1.24 1.30 3.36 5.65 6.19 57.9 43.9 38.9 Eastman Chemical Company EMN USA 12,169 USD 1.67 5.27 6.68 1.90 2.31 2.45 0.98 1.39 1.53 62.25 202.27 256.53 43.9 19.3 18.1
Average 2.67 4.90 6.44 1.70 1.92 2.01 1.02 1.23 1.34 22.00 69.43 87.87 49.8 37.3 35.0
Solvay SA SOLB BE 9,660 EUR 21.38 24.45 26.29 1.91 1.97 2.02 1.50 1.59 1.63 5.34 6.06 6.51 47.6 45.0 45.0
Comparable Company Analysis
These companies are chosen by the analyst and the data are shown by nearest calendar year in descending market capitalization order.
Profitability Analysis
Leverage Analysis
Liquidity Analysis
Gross Margin % EBITDA Margin % Operating Margin % Net Margin % Free Cash Flow Margin %
Debt/Equity % Debt/Total Cap % EBITDA/Interest Exp. Total Debt/EBITDA Assets/Equity
Cash per Share Current Ratio Quick Ratio Cash/Short-Term Debt Payout Ratio %
Last Historical Year
Last Historical Year
3 Moat Valuation 3 Three-Stage Discounted Cash Flow 3 Weighted Average Cost of Capital 3 Fair Value Estimate 3 Scenario Analysis 3 Uncertainty Ratings 3 Margin of Safety 3 Consider Buying/Selling 3 Stewardship Rating
their fair value. A number of components drive this rating: (1) our assessment of the firm’s economic moat, (2) our estimate of the stock’s intrinsic value based on a discounted cash-flow model, (3) the margin of safety bands we apply to our Fair Value Estimate, and (4) the current stock price relative to our fair value estimate.
The concept of the Morningstar Economic Moat™ Rating plays a vital role not only in our qualitative assessment of a firm’s investment potential, but also in our valuation process.
We assign three moat ratings—none, narrow, or wide—as well as the Morningstar Moat Trend™ Rating—positive, stable, or negative—to each company we cover. There are two major requirements for firms to earn either a narrow or wide moat rating: (1) the prospect of earning above-average returns on capital; and (2) some competitive edge that pre- vents these returns from quickly eroding. The assumptions we make about a firm’s moat determine the length of “eco- nomic outperformance” that we assume in the latter stages
enterprise value and the value of the firm if no future net in- vestment were to occur. Said differently, moat value identi- fies the value generated by the firm as a result of any future net new investment. Our Moat Trend Rating reflects our as- sessment of whether each firm’s competitive advantage is either getting stronger or weaker, since we think of moats as dynamic, rather than static.
At the heart of our valuation system is a detailed projection of a company’s future cash flows. The first stage of our three- stage discounted cash flow model can last from 5 to 10 years and contains numerous detailed assumptions about various financial and operating items. The second stage of our mod- el—where a firm’s return on new invested capital (RONIC) and earnings growth rate implicitly fade until the perpetuity year—can last anywhere from 0 years (for no-moat firms) to 20 years (for wide-moat companies). In our third stage, we assume the firm’s RONIC equals its weighted average cost of capital, and we calculate a continuing value using a standard Morningstar Research Methodology for Valuing Companies
Analyst conducts company and industry research:
Financial statement analysis Channel checks Trade-show visits Industry and company reports and journals Conference calls Management and site visits 3 3
3 3
3 3
Strength of competitive advantage is rated:
None, Narrow, or Wide Advantages that confer an economic moat:
High Switching Costs (Microsoft)
Cost advantage (Wal-Mart) Intangible assets (Johnson & Johnson) Network Effect (Mastercard) Efficient Scale (Lockheed Martin)
Analyst considers past financial results and focuses on competitive position and future prospects to forecast future cash flows.
Assumptions are entered into Morningstar’s proprietary discounted cash-flow model.
The analyst then eval- uates the range of potential intrinsic values for the company and assigns an Uncertainty Rating: Low, Medium, High, Very High, or Extreme.
The Uncertainty Rating determines the margin of safety required before we would rec- ommend the stock.
The higher the uncer- tainty, the wider the margin of safety.
Analyst uses a discounted cash-flow model to develop a Fair Value Estimate, which serves as the foundation for the Morningstar Rating for stocks.
The current stock price relative to Morningstar’s Fair Value Estimate, adjusted for uncertainty, determines the Morningstar Rating for stocks.
The Morningstar Rating for stocks is updated each evening after the market closes.
QQQQQ QQQQ QQQ QQ Q
Fundamental Analysis
Economic Moat
TMRating
Company Valuation
Fair Value Estimate
Uncertainty
Assessment
3 Uncertainty Methodology 3 Cost of Equity Methodology 3 Morningstar DCF Valuation Model 3 Stewardship Rating Methodology
* Please contact a sales representative for more information.
Instead, we rely on a system that measures the estimated volatility of a firm’s underlying future free cash flows, tak- ing into account fundamental factors such as the diversity of revenue sources and the firm’s fixed cost structure.
We also employ a number of other tools to augment our valu- ation process, including scenario analysis, where we assess the likelihood and performance of a business under different economic and firm-specific conditions. Our analysts typically model three to five scenarios for each company we cover, stress-testing the model and examining the distribution of resulting fair values.
The Morningstar Uncertainty Rating captures the range of these potential fair values, based on an assessment of a company’s future sales range, the firm’s operating and fi- nancial leverage, and any other contingent events that may impact the business. Our analysts use this range to assign an appropriate margin of safety—or the discount/premium
prices receive our highest rating of five stars, whereas firms trading above our consider-selling prices receive our lowest rating of one star.
Morningstar Margin of Safety and Star Rating Bands
Price/Fair Value 2.75
2.50 2.25 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25
Low Medium High Very High*
* Occasionally a stock’s uncertainty will be too high for us to estimate, in which case we label it Extreme.
• 5 Star
• 4 Star
• 3 Star
• 2 Star
• 1 Star
Uncertainty Rating
— 125%
105% — 80% —
— 95%
— 135%
110% —
70% —
— 90%
— 155%
115% —
60% —
— 85%
— 175%
125% —
50% —
— 80%
New Morningstar Margin of Safety and Star Rating Bands as of August 18th, 2011
Our corporate Stewardship Rating represents our assess- ment of management's stewardship of shareholder capital, with particular emphasis on capital allocation decisions.
Analysts consider companies' investment strategy and
valuation, financial leverage, dividend and share buyback
policies, execution, compensation, related party transac-
tions, and accounting practices. Corporate governance
practices are only considered if they've had a demonstrated
impact on shareholder value. Analysts assign one of three
ratings: "Exemplary," "Standard," and "Poor." Analysts judge
stewardship from an equity holder's perspective. Ratings
are determined on an absolute basis. Most companies will
receive a Standard rating, and this is the default rating in
the absence of evidence that managers have made
exceptionally strong or poor capital allocation decisions.
coverage list.
3 Encapsulates our in-depth modeling and quantitative work in one letter grade.
3 Allows investors to rank companies by each of the four underlying com- ponents of our credit ratings, including both analyst-driven and quantitative measures.
3 Provides access to all the underlying forecasts that go into the rating, available through our insti- tutional service.
different lenses—qualitative and quantitative, as well as fundamental and market-driven. We therefore evaluate each company in four broad categories.
Business Risk
Business Risk captures the fundamental uncertainty around a firm’s business operations and the cash flow generated by those operations. Key components of the Business Risk rating include the Morningstar Economic Moat
™Rating and the Morningstar Uncertainty Rating.
Cash Flow Cushion
™Morningstar’s proprietary Cash Flow Cushion
™ratio is a fundamental indicator of a firm’s future financial health The measure reveals how many times a company’s internal cash generation plus total excess liquid cash will cover its debt-like contractual commitments over the next five years. The Cash Flow Cushion acts as a predictor of financial distress, bringing to light potential refinancing, operational, and liquidity risks inherent to the firm.
3 3 3 3 3
3
The higher the rating, the less likely we think the company is to default on these obligations.
The Morningstar Corporate Credit Rating builds on the modeling expertise of our securities research team. For each company, we publish:
Five years of detailed pro-forma financial statements Annual estimates of free cash flow
Annual forecasts of return on invested capital
Scenario analyses, including upside and downside cases Forecasts of leverage, coverage, and liquidity ratios for five years
Estimates of off balance sheet liabilities
These forecasts are key inputs into the Morningstar Corporate Credit Rating and are available to subscribers at select.morningstar.com.
Morningstar Research Methodology for Determining Corporate Credit Ratings
Competitive Analysis
Cash-Flow Forecasts
Scenario Analysis
Quantitative Checks
Rating Committee
A AA
BBB
C
D
