Thoughts on GTI:
Although GTI has more than doubled from its November low, GTI appears to be significantly undervalued at its current price.
1) Unlike many materials companies, GTI's balance sheet is solid. The company has a debt/equity ratio of 0.28. It has an Altman's Z score of 3.6, which indicates that GTI has sufficient resources to weather the next two years with little risk of bankruptcy.
2) GTI has a price/FCF of 6.4, trades only 20% above its replacement value (Tobin Q-ratio is 1.18), and with a P/E ratio of under 5, it trades at a 45% discount to the industry average P/E. Although these are based on historical earnings (i.e. the first two qtrs of 2008, when steel consumption was higher) steel consumption in 2009 is expected to decline only 5%, and at most 10%, from 2008 levels. Because of demand growth in other business lines (such as from the transportation and energy industries) and expected electrode price increases, forward P/E should actually decrease to 4.5 from the current level of 4.6 (TTM).
The key negative, as I see it, is growth in the accruals ratio (i.e. ratio of non-cash earnings to total assets). Relatively higher levels of non-cash earnings (rising or high accruals ratio) suggest that non-cash items are driving earnings. Academic research in the 90s and 00s has showed that growth in the accruals ratio is negative for stock performance, and this has historically been true for GTI. |
