Long View on ROIC: "Double Leverage" Is a Distant Thesis Until Rate Cuts Start

Research evidence excerpt

Long View on ROIC: "Double Leverage" Is a Distant Thesis Until Rate Cuts Start

C) and

2013 (Chinese supply shock): investors have focused on how M&A made ROIC dramatically worse

(Chart 8), and lifted financial leverage to concerning levels -- even if FCF before dividends remains

positive (Chart 9). This had led to pressure on both capex and capital returns (65% of cash flow in

the 2020s vs. 87% in the 2010s -- more similar to the 64% in the 2000s): in the 2000s, however, M&A

was modest given the focus on growing into the financial leverage post-IPO (Chart 11), whereas in

the 2020s (Chart 13) debt financed the acquisition.

Cash Cycle Room For Improvement: Celanese's cash conversion cycle has deteriorated steadily

since 2015 (Chart 14), mostly due to weaker DIO (Charts 15, 16). This suggests that some of

the margin improvement that Celanese has delivered has been offset by either a deterioration in

forecasting accuracy or a weaker position relative to customers.

Best Proxy For If Consensus Is Wrong On Rates: Currently consensus appears to be that interest

rates will likely be flat-to-higher for the next several quarters. Given its operating leverage to the

automotive and housing cycles, and significant financial leverage, Celanese, in our view, should be

particularly interesting for investors focused on scenarios where the debate in 6-12 months shifts

to central bank easing. Celanese shares have rallied only 3% since early February (vs. up 32% at the Laurence Alexander * | Equity Analyst

peak of the "war trade"), lagging Hold-rated LYB (18% & 52% respectively), Hold-rated DOW (8.3% & (212) 284-2553 | lalexander@jefferies.com

37%), Basic Materials (4% &7%) and the S&P 500 (11% & -5%) Daniel Rizzo * | Equity Analyst

(212) 336-6284 | drizzo@jefferies.com