BMO Analyst Says GrafTech Is 'Turning Graphite Into Cash,' Will Benefit From Strong Industry Fundamentals

GrafTech International Ltd EAF is “turning graphite into cash,” according to BMO Capital Markets, thanks to strong underlying industry fundamentals and its unique vertical integration.

The Analyst

BMO’s David Gagliano initiated coverage of GrafTech with an Outperform rating and $25 price target.

The Thesis

Gagliano highlighted two of the company’s products: Ultra High Power (UHP) graphite electrodes, a critical component of electric arc furnace steel, and petroleum needle coke, the primary raw component in graphite electrodes. The analyst sees GrafTech gaining from this vertical integration and expect it to benefit further in the future.

The company’s contracted position is expected to translate into a 50 percent free cash flow yield over the next two and a half years. “We expect most of this FCF to be returned to shareholders via special dividends,” Gagliano said in a note.

Both products are highly consolidated with only five and 10 companies, respectively, controlling approximately 75 percent of those markets. GrafTech itself produces around 25 percent of the global UHP graphite electrode output.

The key risk in the analyst’s thesis is supply growing faster than expected, driving down prices, although he believes capacity will remain constrained relative to demand growth.

Price Action

Shares of GrafTech opened slightly up Tuesday, trading around $18.92 at time of publication.

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