I'll have to go over TWI's earning report and conference call over the weekend.
I snagged this stock yesterday (GTI) a little over $9. I was shocked at how much it went up after
earnings report. Kicking myself for not picking up more, especially when it went below $9. Here is some
research that I based my purchase on:
This Steel Play Is a Steal
By DAVID ENGLANDER / Barrons July 18, 2012
Shares of GrafTech, whose products are essential for steel production, have been unfairly bludgeoned.
Worries that a global slowdown would dramatically reduce demand for steel have sent shares of GrafTech International tumbling by almost 50% since February.
Granted, as a leading manufacturer of graphite electrodes, which are essential to the production of steel in electric arc furnaces, GrafTech's (ticker: GTI) business would certainly be hurt in such a scenario.
However, the market reaction, in our estimation, appears to be a sharp overreaction.
Even without a pick up in steel demand, GrafTech could start to see improvements soon. In the first quarter, high inventories of graphite electrodes, ordered back in 2011 when demand was strong, allowed customers to delay new orders. By the second half of the year, though, management believes that the glut of inventory will be worked through. That could spur order growth, driving earnings per share (EPS) in the second half of the year 60% higher than in the first half.
At a Glance
Price: $8.88
52-Week Range: $8.45 - $22.46
Market Value: $1.28 billion
Est 2012 Revenue: $1.2 billion
Est 2012 Net Income: $118 million
Est 2012 EPS: $0.80
Est 2013 EPS: $1.12
Est 2013 PE: 8
Dividend Yield: None
GrafTech's shares could rise 25% or more, as a result, in the next 12 months. Shares closed Tuesday at $8.88, below book value of $9.50 a share.
This year, according to FactSet, GrafTech is expected to earn $117.9 million, or 80 cents a share, a 17% decline from the 96 cents a share the firm earned in 2011. Revenue is expected to come in at $1.2 billion. In 2013, EPS could rise 40% to $1.12, as customers restock their inventories. The firm is scheduled to report 2nd-Q earnings on July 26.
Last year, GrafTech derived 86% of its revenue from selling graphite electrodes. These electrodes are 20 feet long, weigh up to 4,800 pounds and are highly conductive to electricity. They allow an electric arc furnace to maintain the high temperature needed to melt scrap metal into molten steel. The electrodes accomplish this by adding huge quantities of electricity to the process and are the only material on the market with these capabilities.
In the March quarter, total sales fell 21% from the same period a year ago, a result of a 27% drop in sales of graphite electrodes, due to weak steel demand and customer inventory destocking.
In the firm's smaller division, which accounts for 14% of revenue, sales increased 12%. In that division, which sells graphite for applications in industries including solar, electronics, automotive and oil and gas, demand for smart-phones drove sales gains. Operating income, though, fell to a loss of $1 million from a gain of $3 million a year ago, due to a slowdown of the solar industry. Management expects the division to return to profitability in the 2nd Q.
GrafTech has a solid balance sheet, with $13 million in cash to debt of $454 million, or net debt at 24% of total capitalization. At the low end of its guidance, management is guiding for $15 million in free cash flow. The cash would likely be used for either share repurchases or an acquisition.
GrafTech's shares look cheap, trading for an enterprise value to estimated 2013 Ebitda (earnings before interest, taxes, depreciation and amortization) ratio of 5.2 times. That's well below its historical average of 8.5. At a more reasonable multiple of 6.5 times, shares would be worth $11.43.
Top 10 Investors: GrafTech International
Investor Name Pos Pos Change % O/S Filing Date
Fidelity Management & Research 19,491,848 4,425,708 13.55 3/31/2012
Royce & Associates 17,086,090 1,105,800 11.88 3/31/2012
Milikowsky (Daniel) 15,247,230 8,579 10.6 3/22/2012
Steadfast Financial 7,215,800 262,000 5.02 3/31/2012
Gabelli Funds 6,987,260 174,572 4.86 3/31/2012
Vanguard Group 5,678,672 150,900 3.95 3/31/2012
Samlyn Capital 5,519,598 -1,308,671 3.84 3/31/2012
Columbia Wanger Asset Management 5,422,400 -250,000 3.77 3/31/2012
BlackRock Institutional Trust 4,280,903 479,284 2.98 3/31/2012
Wells Capital Management 3,613,875 247,569 2.51 3/31/2012
>> GrafTech International: Shares Broken But Competitive Advantages Intact
Matthew Lewis / Seeking Alpha July 3, 2012
Overview: GrafTech International (GTI) manufactures and sells graphite and carbon based products worldwide. The company operates two segments, but the lion's share of the revenue and earnings come from Industrial Materials, which produces graphite electrodes necessary in the production of steel. Shares of the company have been bludgeoned over the last year due to the decline in steel prices and demand. However, GrafTech will be solidly profitable this year and is now trading at under 10 times earnings, providing a great entry point for long term investors looking for value, growth, and long term competitive advantages.
Graphite Electrodes
Graphite electrodes are essential for the production of steel in electric arc furnaces (EAF). EAFs have increased in popularity over the past few decades due to their lower capital costs, energy requirements, and higher flexibility compared to traditional blast furnaces. They now account for over 30% of worldwide steel production, and with the adoption of EAF' in developing countries like India and China, that share is expected to rise. On the most recent conference call, GrafTech CEO Craig Shular noted the Chinese government is initiating the switch to EAF', and that usage is expected to grow nicely in the next decade. Exhibit 1 shows the increase in steel production, EAF share, and graphite electrode demand over the past 35 years.
GrafTech's Competitive Advantages
Warren Buffett once likened a competitive advantage to a moat around a castle. To Buffett, the castle is the business and the moat is the business' competitive advantage. When Buffett invests, he looks for companies with unbreachable moats. GrafTech has two such moats that should ensure the health of the business over the long-term.
First, the graphite electrode market has an oligopoly market structure. There are seven producers of electrodes world-wide and only two (GrafTech and SGL Carbon) are capable of competing on a global scale. Combined, the two companies control about 60% of production capacity. Additionally, the barriers of entry for new market participants are high. Only one new graphite electrodes facility has been built since 1977, a new site by SGL Carbon that was commissioned in 2011. The power of the market structure can be seen by examining quarterly results over the past few years. GrafTech has churned out a profit for the last 21 quarters despite being in a very cyclical business. Even during the doldrums of 2008-2009, when the company was running facilities at 40% capacity, GrafTech continued to report quarterly profits.
Second, GrafTech has positioned itself to be the low-cost producer of electrodes by acquiring needle coke maker Seadrift Coke LP. Needle coke is a petroleum based product and the main component of a graphite electrode. Approximately 40% of electrode cost is derived from needle coke. Graphite electrode producers have long been plagued by the rising cost of needle coke due to the market's similar oligopolistic structure. The Seadrift acquisition even prompted Russian graphite electrode producer Energoprom to file a formal objection to the US Justice Department. Energoprom argued the limited number of needle coke producers (only 4 world-wide including Seadrift); the high barriers to market entry, the lack of substitute products, and low elasticity of demand for needle coke would give GrafTech market advantages over competitors. The complaint was largely ignored by the US Justice Department, and GrafTech was only forced to make minor concessions on its needle coke supply contract with Conoco Phillips in order to gain regulatory approval.
Conclusion
Long-term investors who believe in the future of steel and graphite electrodes should consider buying shares for GrafTech at these depressed prices. As steel producers continue to move toward lower cost EAFs, the demand for graphite electrodes will continue to rise. Oligopoly market structure and vertical integration of needle coke supply provide durable competitive advantages that competitors are unlikely to match. With these advantages, GrafTech should be able to outperform their industry competitors and market over the long-term. |
