STEPAN CO (SCL) stock intrinsic value fair value estimate & owner earnings analysis

Stepan is a Northfield, Illinois chemical maker founded in 1932. About seven-tenths of its sales come from surfactants - the cleaning and foaming agents inside laundry detergents, dish soap, shampoo and body wash, plus agricultural and oilfield uses - sold mainly to large consumer-product companies. The rest comes from polymers (chiefly polyester polyols used in rigid foam insulation for commercial roofs, and phthalic anhydride) and a small specialty products unit. It runs plants in the United States, the United Kingdom, France, Mexico, Brazil, Colombia and China. Demand is steady because people keep washing; profits swing with raw-material spreads (palm and coconut oils, petrochemicals), customer inventory cycles and construction activity. How we measured earnings. We start from operating cash flow, strip out working-capital swings, charge stock compensation as a cost, and deduct the capital spending needed to keep the plants running (spending tied to sales growth is excluded). For valuation we add back cash interest so the whole business is valued first and the debt subtracted second. On that basis the business produced roughly $4.05 to $5.71 a share in 2016-2020, about $2.06 in 2021, then negative amounts in 2022 (-$1.40) and 2023 (-$3.25) while Stepan spent $302 million and $260 million on plants, chiefly the new specialty alkoxylation plant in Pasadena, Texas, which started up in April 2025. It recovered to $2.62 in 2024 and $3.36 in 2025 as spending fell back to about $122 million a year. Because sales fell in 2023, our method treats that heavy construction spending as upkeep, which makes those two years look worse than the ongoing business; we kept them in rather than pick a flattering window. The cash-flow figures reconcile to reported net income in every year once deferred compensation, investment gains, environmental accruals and impairments are accounted for. Acquired-intangible amortization is small (about $6.6 million a year) and does not distort the picture. Starting level. We use the median of the last ten years, about $3.70 a share (about $85 million), as the level for the business as it exists today. Ten years covers a full cycle for Stepan: the 2020 shutdown, the 2021-2022 inflation boom, and the 2023-2024 customer destocking, when operating cash before capital spending fell roughly 15% to 25% below its 2018-2022 average. It sits above 2025's $3.36 and below the 2016-2020 run. First-half 2026 supports it: sales rose about 8.5% and operating cash before working-capital swings rose about $9 million from a year earlier, while plant spending ran at about $108 million a year. Business cash grew 28% in 2025; our first-year figure is about 10% above 2025, which is below that trailing pace. What changed this year. In the first quarter of 2026 Stepan began a restructuring it calls Project Catalyst: it closed the Fieldsboro, New Jersey plant and retired selected equipment at Millsdale (Elwood), Illinois and Stalybridge, United Kingdom, taking a $65.4 million charge that was almost entirely non-cash (under $1 million of cash in the quarter). Those write-downs do not reduce our cash figures. It also signed an agreement to sell a parcel of land near Millsdale for $30 million, expected to close in the second half of 2026. The company has not quantified the savings, so we credit only a modest amount, jointly with the Pasadena ramp-up. Previous figures for this company were built on a different basis and are not comparable. Debt. At June 30, 2026 Stepan owed $647 million and held $114 million of cash. After the expected land-sale proceeds (about $23 million after tax), net debt is about $511 million, or $22.28 a share. Its $450 million revolving credit facility matures on June 24, 2027, so $403 million of debt is now classed as due within a year. Scheduled note repayments are about $135 million, $45 million, $40 million and $40 million in the following years. Lenders require net leverage of no more than 3.5 times; the company stated it was in compliance at December 31, 2025. Most of the fixed-rate notes carry coupons below today's rates; we gave no credit for that. Mid-year debt also includes the usual seasonal working-capital build, which normally reverses in the second half; we did not credit that either. Base case ($42.45). Business cash of $3.70 a share in the first year, rising to $3.90 by year three as Pasadena reaches full use and the Fieldsboro closure removes fixed costs. Both are already built or done, so we treat them as in the bag. It then holds flat. We credit no growth from market expansion, share gains or new products: over the past decade per-share business cash did not grow despite heavy investment, so nothing on the record supports it. After year ten the level holds, because the franchise has supplied the same consumer-staple customers for decades and our figures already charge the cost of keeping the plants up. The business is worth about $1,484 million ($64.72 a share); it owes about $511 million ($22.28); that leaves $42.45 a share. Bear case ($19.97). Year one stays at the 2025 level ($3.36). Then comes a three-year downturn as deep as the 2023-2024 destocking ($2.60 a share, the 2024 trough level), possibly worsened by tighter ethylene oxide rules at Winder, Georgia, Millsdale and Pasadena, which the 10-K names as a risk. Recovery reaches only $3.20, and from year ten earnings shrink 2% a year, matching the decline in per-share business cash from 2016 ($4.05) to 2025 ($3.36). In that downturn leverage would approach the 3.5x limit just as the June 2027 revolver and the 2027 notes need refinancing, so we add about $42 million of extra interest cost. The business is worth about $1,010 million ($44.08 a share); it owes about $553 million including that refinancing penalty ($24.11); that leaves $19.97. Even at the trough, business cash of about $60 million covers interest of roughly $30-40 million. Bull case ($53.02). Pasadena and the restructuring deliver fully, and per-share business cash returns to $4.60 by year four - inside the $4.05-$5.71 range of 2016-2020 - then holds. The business is worth about $1,726 million ($75.30 a share); it owes $511 million; that leaves $53.02. Margin-of-safety price. We are moderately confident in the earnings level. Ten years of audited cash flow sit around $3.70, and the most recent year and half-year are close to it, but per-share cash has not grown in a decade, and the payoff from about $1.1 billion of plant spending since 2020 is not yet visible. The worst plausible outcome is a long spread squeeze in surfactants together with regulation that limits ethylene oxide use at its U.S. plants, arriving just as the 2027 refinancing is due. The business would survive that: its assets are hard plants spread across more than a dozen sites on four continents, it sells to many consumer-product makers, and the debt is moderate. But the owners could face costly refinancing or a dividend cut. If we are wrong about Pasadena and the restructuring, and the business simply earns its 2025 level for good, the shares are worth about $34. If a downturn arrives first, they are worth about $20. Cash dividends have risen every year for more than a decade (from $16.3 million in 2015 to $35.0 million in 2025) and now run at about $1.55 a share. The price assumes a three-to-five-year holding period; from $22 the base case implies roughly 20% a year, and the bear case implies a return slightly above zero because the dividend carries through the trough. Above about $22, the bear case and the refinancing date leave too thin a cushion for a 20% target; that is why the margin-of-safety price is $22.