Description
Rogers Corporation (ROG) $112.49
Summary
Rogers Corporation (ROG) manufactures high-performance engineered materials solutions for a variety of end markets. The company is a classic orphan stock due to a scuttled merger with DuPont due to lack of Chinese regulatory approval. Rogers lost their traditional shareholder base during the merger, analysts stopped following the company, no earnings calls were held since July 2021, and in the last year, supply chain issues caused profitability to fall. The Company has a healthy growth outlook and a solid balance sheet and should be able to return to historical profit margins in 2023 and growth should accelerate in the next two years. The expected performance turnaround combined with resuming investor relations efforts should result in a stock that does not remain orphaned for long.
Background
Rogers operates in two business segments: Advanced Electronics Solutions (AES) and Elastomeric Material Solutions (EMS). AES represents roughly $550MM in revenues split between a $300MM high frequency circuit board laminates business and a $250MM ceramic substrates business. EMS is a $400MM precision foams business.
End markets are experiencing high growth, such as electric vehicles and vehicle autonomy systems (ADAS), as well as 5G antennas, cell phones, and military radar applications. Revenue growth over the next five years should range from high single digits to low teens.
The Opportunity
DuPont announced a deal to acquire Rogers for $277/share in cash on November 2, 2021. There was an expectations for $115MM in cost synergies and DuPont was paying 19x F2021E EBITDA pre-synergies and 14x post-synergies.
The deal got all necessary regulatory and shareholder approvals in 2022 except from China. It is suspected that the withholding of approval by China had more to do with geopolitical tensions than any defect of the deal itself. Ultimately, as the deal hit the 1 year contractual limit for closing, DuPont announced on November 1, 2022 that they were walking away from the deal. Rogers received a breakup fee of $164.5MM pretax ($110MM after-tax). The stock collapsed to $98 following the deal termination and has since rebounded to $112.
Over the course of the last year since the deal was announced, Rogers withdrew from investor engagement. The last earnings call was held in July, 2021. The shareholder base largely sold and moved on when the deal was announced and the shareholder base in September was largely merger arbitrage and index funds. The arbs sold when the deal broke. No analyst estimates are published, and the Company has not provided any earnings guidance and will not until February 2023 for the Q422 earnings call.
In addition, supply chain challenges caught up to Rogers in 2022 and profitability fell sharply. Some relates to the closure of customer production in China due to covid restrictions, some to materials inflation, etc. This should all naturally resolve in 2023, according to a brief call the Company hosted on December 8th.
Finally, the end markets Rogers participates in require suppliers to invest up front to get designed into the specification for the product, whether a 5G antenna or an EV power bus, suppressing current earnings. However, once designed into the specification, they have a secure position for years to come in that product line where they are unlikely to be displaced. Much of the future growth of Rogers is tied to Electric Vehicles (EVs) which are on the cusp of significant growth over the next five years and Rogers’ EV business has grown 40%+ in 2022 ytd.
Also, the Company has promoted the head of the EMS division to become CEO in January 2023 and he is prioritizing restoring the company to historical profitability levels and energizing growth.
The Data
No consensus estimates currently exist which creates an information vacuum, and the stock does not look inexpensive at first glance given the decline in profitability in 2022. I believe most investors are not giving Rogers a close look. If they did, they would see a $1b business that should be able to conservatively grow at 8% p.a. over the next few years and should be able to restore gross margins from 33% ytd back towards 36% - 38% historical levels. This would result in EBITDA margins expanding from the currently suppressed 14% back to 21% - 23% historical levels and EBIT recovering from 10% to 13% - 14% historical levels. EPS should expand from $3.82 for LTM towards $6 - $8 by 2024.
Assuming that growth accelerates and profitability returns to historical levels, the stock should get substantially rerated. EBITDA could grow from $140MM in 2022E to $240 - $250MM in 2024E. Assuming an EBITDA multiple in line with pre-deal history of 14x – 16x and you get an enterprise value of $3.4b - $4b in early 2024. This would equate to a share price of $180 – 214 or 60% - 90% above the current quote.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
Orphan stock will resume investor relations activities in early 2023. Restoring profitability as supply chain issues abate and actions are taken to improve efficiencies and lower costs. Ultimately, growth investments in high-growth end markets like EVs, clean energy (wind & solar), Autonomous driving, 5G antennas, and military radar should start boosting revenue growth significantly over the next few years and the stock should get an appropriate rerating.