PolyOne: Play on Plastic Replacement

Plastic is in the headlines on a daily basis  -  and not in a flattering light. Since scientists and engineers first figured out how to craft the carbon molecules in petroleum over eight billion metric tons of plastic have been produced in the world.  Unfortunately, the durability and resilience that made plastic materials so attractive in the first place are now proving to be the reason plastic is now posing a thorny environmental problem.  About three-fourths of the plastic produced so far or six billion tons are no longer in use and have found the way into the ecosystem either in landfills or as free traveling waste. Even the food chain is now laced with tiny bits of polymers called ‘microplastic.'

Under fire to find more sustainable alternatives, plastic producers have been scrambling to add biodegradable materials to their product lines.  Even if end-users are not responsible enough to properly recycle or dispose of plastic, biodegradability could mean the plastic product will breakdown into the benign materials and chemicals.  Environment remains safe and food is still tasty and nutritious.

Investors who seek opportunity in the transition to sustainability might find PolyOne Corporation (POL:  NYSE) an interesting option.  The company develops polymers  -  the large molecule materials used as plastics or resins.  Its product line includes colors and inks, as well as special polymers destined for thermoplastic materials and composites, polyvinyl molding and plastic components.  The company distributes over 4,000 grades of resin used in injection molders and extruders that make molded and shaped plastic products.

PolyOne earned $142.1 million in net income or $1.79 per share on $3.5 billion in sales in the twelve months ending June 2019.  In the same period the company converted 7% of sales to operating cash flow.  Strong profits and cash flow generation help make the 260% debt-to-equity ratio more palatable.

Those financial metrics are about to change for PolyOne.  Last month the company announced plans to sell its performance products and solutions segment that encompasses polyvinyl molding and polypropylene-based materials.  A private equity fund, SK Capital Partners, is paying $775 million in cash for the operations.  The deal will strip about $700 million from PolyOne’s revenue line. 

The cash will not sit in the bank for long.  PolyOne management has already indicated plans to reduce debt enough to bring the ratio of net debt to EBITDA closer to two times from the current ratio in excess of three times. 

The balance of the asset sale proceeds will be invested in specialty materials, colors and inks.  Most likely PolyOne engineers have plans for more products like their new black colorants launched in early July 2019.  The colorants are intended for plastic packaging and will replace non-recyclable additives.  PolyOne’s colorants contain no carbon black pigment and can be ‘read’ by the automatic optical sorting sensors used in waste management systems to sort out recyclable plastics.  Plastic products made with PolyOne’s new black colorant can be recycled and are less likely to end up in landfills. The product group name is a mouthful  -   OnColor Infrared Sortable Blacks for Recyclable Packaging  -  but that is apparently all customers need to know about the eight black shades and custom colors PolyOne is ready to provide.

The colorants are not a one-off attempt at being a friend to the environment.  In June 2019, PolyOne added a silicone-based option to its line of water-based screen-printing inks.  The silicon-based ink is expected to meet the performance requirements of garment manufacturers who need durability and elasticity in screen-printing ink but do not want to use polyvinyl chloride products.

Shares of PolyOne traded off following the announcement to sell one of its significant segments.  However, that sell-off may have been more in sympathy with turmoil in the broader U.S. equity market as investors fretted over trade wars and tariffs.  The stock has recently shown some new life.  Even with the upturn, the shares are trading near 18 times trailing revenue and offer forward dividend yield of 2.5%.  Analysts may still be sorting out earnings projections without the performance products segment, but for now the shares are priced at 12 times the consensus estimate. 

With a new and interesting environmentally-friendly product line developing, PolyOne may very well be able to deliver double digit growth rates in the years ahead.  That might make the current price multiple look compelling.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.