Trinseo PLC: 2023 Could Be A Lost Year (NYSE:TSE)

Trinseo PLC (NYSE:TSE), which manufactures and sells plastics and latex binders in various markets around the world, is coming off a disastrous fourth quarter, where all of its big segments were down in a big way, with the only segment doing fairly well being its very small Feedstocks business.

The usual reasons for its underperformance were given, including COVID-19 impacts in China, the conflict between Russia and Ukraine, increasing interest rates, rising energy prices in Europe, destocking, and the overall macro-economic weakness around the world resulting in shrinking demand for its products.

The three major challenges I see for TSE in 2023 is energy costs in Europe, how much China recovers, and the pace of destocking by its customers, which will determine demand and the size of orders going forward.

In this article we’ll look at some of its recent numbers, potential macro-economic impacts in 2023, and why I think destocking is going to take longer than the company thinks to work itself out.

Some of the numbers

Revenue in the fourth quarter of 2022 was $957 million, compared to revenue of $1.3 billion in the fourth quarter of 2021. Revenue for full year 2022 was $4.97 billion, compared to revenue of $4.83 billion for full year 2021.

Net loss in the fourth quarter came in at -$(364.00) million, or -(10.42) per diluted share, compared to net income of $1.00 million, or $0.04 per diluted share in the fourth quarter of 2021. Net loss for full year 2022 was -$(428.00) million, or -$(11.91) per diluted share, compared to net income of $280.00 million, or $7.07 per diluted share for full year 2021.

EBITDA in the reporting period was -($322.00) million, compared to $103.00 million in the fourth quarter of 2021. EBITDA for full year 2022 was -$(120.00) million, compared to EBITDA of $587.00 million for full year 2021.

Adjusted EBITDA for the fourth quarter was $6.00 million, compared to adjusted EBITDA of $133.00 million for the fourth quarter of 2021. Adjusted EBITDA for full year 2022 was $312.00 million, compared to adjusted EBITDA of $729.00 million for full year 2021.

Management gave guidance for full 2023, and it projects net income from continuing operations to be in a range of $3.00 million to $33.00 million, and adjusted EBITDA to be in a range of $375.00 million to $425.00 million.

Cash from operations for full year 2023 is expected to be approximately $100.00 million, which management believes will bring it to breakeven free cash flow.

The weak numbers speak for themselves, and I believe the company is going to struggle to gain any traction through 2023, based upon the strong probability it’s going to take longer to work through the various headwinds than the market, and management, thinks it will take.

I’m not just talking at the company level, but the macro-economic and geopolitical levels as well.

Why expectations are too optimistic

Demand in China has been low for TSE’s products, and when taken together with the higher costs of production in Europe, it brought about an arbitrage opportunity for Asian products to gain share in North America and Europe.

As for energy inputs in Europe, there is good news in that natural gas prices may remain at a lower level than last year, which would be a positive catalyst for TSE, but on the other hand, oil prices are expected to rise during 2023. That could offset some of the natural gas gains, assuming natural gas prices remain down from recent levels.

What this did was put pressure on volume and margin in the reporting period, which had direct impact on the products that competed more on price, rather than its specialized products that retained their pricing power. This has been going on during the second half of 2022.

With management believing demand in China will rebound and cost inputs in Europe to level out, expectations are the impact of these catalysts on the company are going to shrink in 2023.

Over the long term I think that is probably how it’s going to work out, but for most, if not all of 2023, I think it’s going to continue to weigh on the company. My thought there, as far as energy costs go, is it’s far too early to declare victory there yet. And we have yet to see if natural gas prices remain subdued, and what effect the higher cost of oil will have on the company in the quarters ahead.

In regard to destocking, the company sees that being worked through in the early part of 2023, and expects demand for products afterwards to climb through the year.

That said, management added that a lot of the company’s customers will probably keep inventory in place until there’s confirmation sustainable demand has emerged.

The company noted that under normal circumstances destocking cycles for some of its products usually take a couple of quarters to work themselves out. After that, the usual response is for there to be a quick increase in orders. Management said it’s not including those historical restocking practices in its guidance for 2023.

The bottom line for TSE’s guidance is the headwinds that have been working against it over the last year or so are going to rapidly be mitigated in 2023, which will lead to a significant improvement over the next year.

In my opinion that’s far too much to assume. That means energy costs in Europe will remain lower, China demand will increase, destocking will be largely over by the end of the first calendar quarter of 2023, and the global economy will improve, all of which will protect it from its lower-priced competitors in regard to a number of its products.

I see this as being too positive in the time frame the company is thinking of. For that reason, I believe 2023, at best, will be, for the most part, a lost year or a wash; as least, as it relates to the performance of the firm.

Thoughts on its share price movement

While I stand fully behind my thesis, one thing to consider with TSE is to what level this is already priced into the stock, and if it has nowhere to go but up.

First, I want to take a look at a 10-year chart of the company. As you can see below, it has been very volatile over time, and it hasn’t been able to sustainably and consistently boost its share price over the last decade.

For long-term holders, it could have been bought at a similar price in September 2015, as it is trading at today, which as I write is between $26.00 and $27.00 per share. The same could be said for August 2020 as well, when it was trading at similar price levels as to what it’s trading at today.

My point in looking at the chart is it has long periods of time when it enjoys an upward growth trajectory with its share price, and also prolonged periods of time when it is in a downward trajectory.

Why this is important to consider is that share price has bounced off its 52-week low of $17.54 per share and is now in the midst of a stair-step pattern. It has had a triple bottom of approximately $17.50 from September 29, 2022, to October 25, 2022; another double bottom of about $22.00 per share from December 20, 2022, to December 29, 2022, and another triple bottom of around $25.00 per share from January 19, 2023, to February 10, 2023.

When looking at the chart, you can see in the past it has been able to maintain its stair-step pattern and ride it to high levels, as it did from October 2014, when it was trading at approximately $12.00 per share, and not stopping until it reached its 10-year high of about $85.00 per share.

As you look at the stock’s trading pattern over time, it would appear it’s primed for another, big upward move. While it looks that way, we need to understand its performance was in a long-term bull market, which even then it wasn’t able to hold as it started to crash in October 2018, and didn’t start to find a bottom until March 2020.

It needs to be considered that we are now in a bear market under unusual economic conditions, and how the share price behaved in the past doesn’t guarantee it’ll do so in the same way this time around. That would be true, of course, during any market, but it’s especially true at this time.

For that reason, in the near term the price to watch would be $25.00 per share. If it’s able to hold there, it could start another prolonged, upward run. As for the ceiling, I would watch for it to break past, and stay above, $30.50, as it has a double top there going back to August 26, 2022.

Something to consider is, there have been lower highs and lows about equal to past lows, which suggests the upside for TSE may not be what it was in the past.

Conclusion

Based upon the fundamentals and current market conditions, it is my opinion that TSE has a higher probability of pushing further downward, or at best, trading level in the quarters ahead.

Even so, based upon its historic share price movement, it could break out if it’s able to break out past the $30.50 mark, and move even much higher if it sustainably pushes past $36.00 per share, which it was trading at on July 28, 2022.

It’s quite possible it could do so, but I don’t think it has the tailwinds to do so at this time. And when taking into account the next numbers expected to come out for the first quarter of 2023, I think they are going to reflect ongoing weakness in the catalysts mentioned earlier in the article. If that’s how it plays out, the stock will continue to struggle, and I think will result in it struggling to gain momentum throughout 2023.

Assuming the share price collapses further and tests its 52-week low, that would be a time to take a closer look at the company, as over time I do think it’s going to rebound again, and when it does, those getting in at a great entry point with an attractive cost basis could do well over time.