Chase Q3 Results: Rising Inflation Limits Organic Revenue Growth (NYSE: CCF)

Andresr

Investment thesis

Chase Corporation (NYSE: CCF) is a specialty chemicals company based in Westwood, Massachusetts, USA. The company recently released fiscal 22 third quarter results, which I will detail in this report. Inflation caused serious problems for the company, limiting its gross margin and affecting future growth. I believe the company is struggling to maintain organic revenue growth, and that is a serious cause for concern.

About Chase Corporation

Chase Corporation is an American specialty chemicals company that produces protective materials in various market segments. The company can be categorized into three sectors of activity; Adhesives, Sealants and Additives Segment, Industrial Tapes Segment and Corrosion Protection and Waterproofing Segment. The Adhesives, Sealants and Additives segment offers a wide range of products including end-use products and products integrated with other company’s products. Products in this segment include adhesive systems for electronics, polymer microspheres, polyurethane dispersions, moisture barrier coatings and cleaners. The Industrial Tapes segment caters to other manufacturers with wire and cable materials, specialty tapes and other laminates and coated products. This segment sells products to the cable manufacturing, utility and telecommunications, and electronics packaging industries. The Corrosion Protection and Sealing segment serves infrastructure development companies for oil, gas, highway, sewage pipeline and bridge deck projects. Key products in this segment include protective coatings for pipeline applications, coating and surfacing systems for waterproofing and liquid storage applications, high performance polymer asphalt additives and joint expansion systems for waterproofing applications in the transportation and architectural markets. Chase Corporation operates several manufacturing plants in the United States, Europe and Asia.

Third quarter 2022 results

Chase Corporation released quarterly results on July 11, 2022 for the quarter ending May 31, 2022. Based on my analysis of third quarter 2022 results, the company underperformed across all business segments. The results were not in line with estimates and the company saw a contraction in margins in all segments. I think the company was heavily affected by rising raw material prices, which put significant pressure on product prices, ultimately leading to weaker demand and tighter profit margins.

Now let’s look at the numbers. The company reported total revenue of $88.6 million, 11% growth compared to $79.5 million last year. The growth in turnover reflects an increase in the selling price of the products. According to my analysis, inflationary pressure forced the company to raise product selling prices and the company did not experience any organic revenue growth. Adhesives, Sealants & Additives revenue increased 9% to $36.7 million compared to the third quarter of 2021. Industrial Tapes revenue increased 19% to $38.3 million. dollars compared to the corresponding quarter of the previous year. Revenues from the Corrosion Protection and Sealing segment were flat at $13.5 million compared to the same quarter last year with an increase of less than 1%. I think outside of the Industrial Tape segment, the company has seen a decline in organic revenue growth if we take out the product price increase. Gross margin was 38.6% this quarter compared to 41.8% in Q3 2021. Even after serious cost reduction measures and sales price increases, gross margin contracted due to the increase product costs. Net income increased marginally by 8% from $14.3 million in Q3 2021 to $15.5 million in Q3 2022. Diluted earnings per share (EPS) was $1.64 compared to to $1.50 in Q3 2021. The company saw a reduction in free cash from $15.9 million to $13 million, primarily due to higher inventory levels. The company is increasing its inventory levels to fill pending orders.

According to my analysis, the company has a strong balance sheet with no long-term debt and a cash balance of $124.7 million. Chase Corporation also has a revolving company $200 million credit facility. That’s one factor that stands out for the company, strong liquidity. But the main problem for the company is the growing inflationary pressure which is shrinking its margins. Problematic macro factors will limit the company’s organic growth, and unless the company finds a way to support its demand with efficient cost of production, I recommend against taking any new positions in the stock.

Adam P. Chase, President and CEO of Chase Corporation, said:

Chase Corporation continued to face headwinds from global commodity inflationary pressures, labor shortages and supply chain constraints, which are expected to persist throughout the year. As such, we remain very proactive in our efforts to mitigate the effects of these macro challenges, including engaging in close conversations with our suppliers, as well as implementing appropriate pricing measures where necessary. Our company remains committed to protecting our margins as well as serving our customers, shareholders and employees through appropriate staffing, excellent safety standards and optimal business efficiency.

What is the biggest risk facing Chase Corporation?

Rise in commodity prices

Chase Corporation has been hit hard by rising commodity prices globally. High raw material prices have led to increased production costs for the company. The company is heavily dependent petroleum-based raw materials for production, and in FY21 the company struggled to manage selling prices with soaring oil prices. I believe inflation in all commodity segments will continue in FY22 and limit the company’s gross margin. Going forward, the company could face weakened demand as the US and European economy slides into a possible recession. The company is taking steps to manage this risk by improving inventory levels and employing drastic cost-cutting measures, but these efforts are not translating into meaningful results.

Technical analysis and fundamental valuation

Chase Stock Technical Analysis Chart

Technical Analysis (Investing.com)

Chase Corporation recently crossed its 50- and 100-day weighted moving average (WMA). This usually reflects further momentum from the title. But I think it’s early to make a decision based on the WMA, and I advise waiting a few weeks to see if the stock holds above the 50-day and 100-day WMA. The RSI indicates that the stock is heading into the overbought territory as it breaks through the 70 band range. The stock could take a big drop after testing the 70 band, so I recommend not creating a new position in the stock at this time.

I think the Chase Corporation is fairly valued at current levels. The company has a P/E multiple of 18.20x. The stock price was down 26% from its 52-week high of $119 and is currently trading at $87. Given the weak outlook for the company, I would recommend not taking any position in the stock right now, and for investors who are already invested in the stock, they can hold the stock and wait for the macroeconomic situation is improving.

Conclusion

Chase Corporation is struggling to maintain gross margins given mounting inflationary pressure. The company is trading at a P/E multiple of 18.20x, which I believe is a fair valuation for the company, and the stock price explained the negative market trend. I think the company has poor growth prospects given the rising inflation in the economy. I recommend a holding rating for Chase Corporation after considering all of these factors.