FA Alpha Daily

This company’s chemicals are crucial for Pax Americana

The U.S. economy is being boosted by increased investments in the supply chain and higher demand for American oil and gas. One company that is benefiting from these two major trends is Ingevity (NGVT), a manufacturer of performance chemicals that are used in a variety of applications, including infrastructure and energy. However, market pessimism towards the company has led to it being mispriced. In today’s FA Alpha Daily, we’ll look at Ingevity using Uniform Accounting and see how its mispricing can be a great investment opportunity for potential investors.

FA Alpha Daily:
Thursday Uniform Accounting Analysis
Powered by Valens Research


Two significant forces are at play for the future of the U.S. economy.

The first major force is the supply-chain supercycle. This term refers to the increased investments and efforts to strengthen the crucial network that ensures the smooth flow of goods across the nation.

These improvements stem from a realization following the COVID-19 pandemic that the U.S. supply chains were fragile and vulnerable. In response, the government and businesses have teamed up to make these supply chains tougher and more efficient.

One clear example of this collaboration is the Bipartisan Infrastructure Bill.

This bill aims to channel significant funds into enhancing the country’s infrastructure, which includes crucial aspects of the supply chain. Fixing and upgrading roads, bridges, and ports – all to ensure that products can move quickly and safely from one place to another.

The bill aims to funnel $1.2 trillion into the nation’s infrastructure and create 1.5 million jobs per year for the next ten years.

The second force is the increased demand for American oil and gas. As Russian energy supplies have diminished, there’s a newfound reliance on U.S. resources to fill the gap.

EU members imported 275.6 million tonnes of energy products from Russia in 2021. After the sanctions, imports from Russia are down to 156.2 million tonnes in the first three quarters of 2022.

This has paved the way for higher demand for U.S. energy. U.S. crude exports to Europe hit a record 2.1 million barrels per day in March 2023, solidifying the rising need for U.S. energy.

This is where Ingevity (NGVT) comes into the picture. It benefits from both of these economic forces.

The company specializes in performance chemicals – substances vital to the infrastructure and energy industries. These chemicals are like secret ingredients that make things work better.

They’re used in pavement and road striping, helping construct durable and safe roadways. Moreover, they’re essential in the oil industry, used in oil well service additives and production.

In essence, Ingevity’s performance chemicals are a key ingredient in the recipe for economic growth.

Ingevity is also stable and profitable. The company managed to keep its Uniform return on assets (“ROA”) around 15% for the last six years, consistently delivering strong financial performance.

Take a look…

This shows the company has successfully built a stable business, even against troubling times like the pandemic.

Despite these favorable circumstances, the market seems to have reservations about Ingevity’s future profitability.

We can see this through our Embedded Expectations Analysis (“EEA”) framework.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market expects the company’s ROA to fall to 8%, which would be the lowest since 2016 when the company went public.

The market has a pessimistic viewpoint about Ingevity.

While the company is riding on strong tailwinds driven by the supply-chain supercycle and energy demand, the market has concerns about how these factors will play out in the long run.

The evidence suggests that Ingevity is strategically positioned to benefit from these tailwinds.

The market remains skeptical, causing mispricing and creating an opportunity for investors to take.

SUMMARY and Ingevity Corporation Tearsheet

As the Uniform Accounting tearsheet for Ingevity Corporation (NGVT:USA) highlights, the Uniform P/E trades at 16.2x, which is below its corporate average of 18.4x but around its historical P/E of 15.4x.

Low P/Es require low EPS growth to sustain them. In the case of Ingevity, the company has recently shown a 10% growth in Uniform EPS.

Wall Street analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.

We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, Ingevity’s Wall Street analyst-driven forecast is a 35% EPS shrinkage in 2023 and a 29% EPS growth in 2024.

Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Ingevity’s $49.64 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to shrink by 8% annually over the next three years. What Wall Street analysts expect for Ingevity’s earnings growth is below what the current stock market valuation requires in 2023 but above its 2024 requirement.

Furthermore, the company’s earning power is 3x its long-run corporate average. Moreover, cash flows and cash on hand are 2x its total obligations—including debt maturities, capex maintenance, and dividends. Also, the company’s intrinsic credit risk is 290bps above the risk-free rate.

All in all, this signals average credit risk.

Lastly, Ingevity’s Uniform earnings growth is below its peer averages and in line with its average peer valuations.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

The Uniform Accounting insights in today’s issue are the same ones that power some of our best stock picks and macro research, which can be found in our FA Alpha Daily newsletters.

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