Apollo acquisition of Covestro will boost interest in cyclical stocks

Apollo acquisition of Covestro will boost interest in cyclical stocks

Apollo acquisition of Covestro will boost interest in cyclical stocks

Investing.com – This week, heavily influenced by IPOs with voracious demand for growth, ends with the good old story of cyclical stocks.

On Thursday, Bloomberg reported that Apollo Global is considering acquiring German chemical company Covestro, which is a perfect example of plummeting cyclical stocks whose strengths have been largely forgotten in the midst of chaos this year.

Spun-off from the BAYER conglomerate, Covestro is a classic cyclical company. While much of the excitement surrounding the company's spin-offs has been driven by how its advanced plastics can make the cars of the future lighter, it only generates a fifth of its revenue from automobile production. The rest of the profits are relatively evenly distributed between the furniture, construction, electronics, chemicals, health and cosmetics sectors.

Cycling has been tough on Covestro for the past two years. Its EBITDA peaked in 2017 at 3.4 billion euros ($ 4.0 billion) and halved by 2019, when President Donald Trump's attack on the Chinese economy hit a market that accounts for a quarter of the company's revenues.

The pandemic exacerbated everything significantly: the group's revenue fell by 23% in the first half of the year, and the lack of transparency led to the fact that the EBITDA forecast for the entire 2020 was at the level of 700 to 1.2 billion euros. Net debt of nearly 3.2 billion will more than quadruple EBITDA at the bottom of this range.

Short-term investors are generally worried about these developments, and Moody's June solvency rating downgrade to BAA2 (Satisfactory) with a negative outlook did not help her much either.

Nevertheless, Apollo is ready to turn a blind eye to the company's cyclical volatility. After the financial crisis, Apollo has already invested in the chemical company LyondellBasell. Compared to the Lyondell balance sheet at the time, the Covestro balance sheet today looks like a real fortress. If confirmed, the interest in Covestro by a buyout group with a similar track record would prove to be a huge vote of confidence.

Even after a 7% rally on Friday in response to the news, 74% above March lows, Covestro shares still barely hit half of their cyclical peak in 2018.

Although it may take some time before the cycle makes a decisive positive reversal, reports of such interest are a strong argument for the limited decline in stocks.

By Jeffrey Smith

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