Avient Corporation: Disappointing After An Interesting Setup (NYSE:AVNT)

When Avient Corporation (NYSE:AVNT) announced the sale of its distribution business in September, I concluded that the company was completing its transition. That sale was well-telegraphed, as the softer full-year outlook implied some expected weakness in the second half of the year.

A Recap

Avient Corporation is an interesting business, which became a bit more special following the acquisition of the color masterbatch business of Clariant in 2020 by PolyOne, rebranding the business to be called Avient in the process.

Since the outbreak of the pandemic, Avient Corporation has seen very strong momentum. 2021 sales eventually came in at $4.8 billion, on which adjusted earnings of $280 million, or just over $3 per share, were reported.

Net debt of $1.26 billion worked down to a 2.2 times leverage ratio based on $581 million in EBITDA, as the company guided for continued sales and earnings growth in 2021. Moreover, a somewhat cyclical business in the past has benefited from improved positioning towards more defensive and diversified end markets.

Avient Corporation shares jumped from $45 to $50 in April 2022, as the company acquired the protective materials business from DSM in a $1.5 billion deal. That deal looked relatively fair, adding $415 million in sales and $130 million in EBITDA, moreover having a decent growth profile. Pro forma net debt would increase to $2.8 billion, for a 3.7 times leverage ratio.

After I turned upbeat on Avient at the time of the deal with DSM, shares lagged and traded in their $40s amidst general market weakness and increased uncertainty on the economy at large. After posting earnings at $1.96 per share for the first half of the year, the company guided for full-year earnings around $3.50 per share, implying some weakness in the second half of the year.

In August of last year, the company announced the sale of the distribution activities in a $950 million deal, although that net proceeds after taxes only came in at $750 million, reducing pro forma net debt to $2.0 billion. Amidst these deals, I pegged net debt around $2 billion, leverage around 3 times, with earnings power seen around $3.50 per share. All in all, I was quite upbeat on the pro forma situation and the valuation attached to Avient Corporation.

Stuck After Softer Operating Performance

Trading at $40 in the summer, shares of Avient actually fell all the way to the low thirties in the fall, although they since have recovered to $40 right now. In September of last year, the company closed on the deal with DSM, while the divestment of the Distribution activities closed in November.

After having warned on the profitability due to additional lockdowns in China, the company posted full-year adjusted earnings of $2.69 per share in February of his year, up a penny from the year before, but coming in eighty cents lower than previously guided for. Amidst the moving parts in terms of M&A, full-year sales were flattish at $3.4 billion. While the earnings fell way short compared to expectations, net debt of $1.5 billion was much lower than anticipated.

Somewhat discomforting is the outlook for 2023, driven by the same factors which resulted in a softer performance in the second half of the year being a slower restart of China, higher interest rates, and softer consumer demand. Full year sales are seen flattish at $3.45 billion, with earnings actually seen down to $2.40 per share, on the back of $530 million in adjusted EBITDA. Despite the lower profitability, Avient Corporation’s leverage continues to come in below 3 times, but arguably this is much softer than expected.

The first quarter results provided few reasons to be upbeat with sales down 5% to $846 million, with adjusted earnings down twenty-six cents to $0.63 per share. Avient Corporation expects largely similar results in the second quarter, with the full-year guidance kept unchanged, implying a somewhat cautious guidance, or perhaps softer performance in the second half of the year, as net debt ticked up to $1.6 billion following poor cash flow conversion.

And Now?

Having averaged my Avient Corporation position at $45 last year, I find myself stuck in a rough space as shares now trade at $40, having recovered a third from their lows. The overall 10% decline is, of course, disappointing, but perhaps it is the operational performance which has been more disappointing as earnings trend more than a dollar lower than guided this time last year.

Amidst this, I find myself performing a balancing act. I am disappointed by the Avient Corporation’s performance as of recent, making me inclined to sell out of my position around breakeven levels in the mid-forties. The Avient Corporation investment case appears to be indefinitely impaired, at least for the time being.