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Graftech Bends But Doesn't Break
Finding good news in the stock markets isn't easy these days, so it was heartening to stumble upon an Ohio
IN PICTURES: How To Make Your First $1 Million
Results Are Good
It announced third quarter earnings in early November and net sales were up 26% to $316 million from $251 million year-over-year, and operating income grew 57% to $87 million from $55 million in the same quarter of 2007. Most impressively, its operating margin increased by 550 basis points to 27.5%, helping to produce cash flow in the first nine months of $171 million, more than double the same period a year earlier. As a result, it was able to reduce net debt by $285 million, which in turn cut interest expenses by more than 50% to less than $13 million.
The industrial materials division, Graftech's primary source of revenue, saw third quarter sales increase by 24% to $266 million from $215 million in 2007. Operating income increased 43% to $74 million, up from $52 million a year earlier. Its engineered solutions division witnessed a sales improvement of 39% to $50 million from $36 million a year earlier and most importantly, its operating income improved almost 400% to $13 million from $3 million in 2007. (Learn how to gather all the pieces before you start to put together your puzzle, read The Flow Of Company Information.)
Management Cautious
In its third quarter press release, it indicated that the fourth quarter and 2009 would be challenging due to the global recession. It went on to say EAF steel production would be down in the fourth quarter. Due to this slowdown, it revised its full-year numbers for 2008 downward indicating sales would increase 18% to 20%, operating income 35% to between $315 million and $330 million with cash flow from operations increasing to $210 million, up from previous guidance of $190 million. (Explore the controversies surrounding companies commenting on their forward-looking expectations, check out Can Earnings Guidance Accurately Predict The Future?)
Despite its caution, these numbers seem awfully strong. KeyBank Capital Markets' Mark Parr, head of its equity research department, recommended back in December buying several steel stocks including Nucor (NYSE:NUE), Reliance Steel (NYSE:RS) and Cliffs Natural Resources (NYSE:CLF). While it is an endorsement of the industry itself, most important is the fact Parr and his firm both own stock in Graftech.
It's Come So Far
While 85% of revenue comes from industrial materials, such as graphite electrodes, the remaining 15% that comes from advanced graphite materials and other engineered solutions. This is what has made the difference in its profitability. In three short years, its operating margin for engineered solutions grew from 1.7% in 2006 to 22.1% for the first nine months of 2008. That's been a key factor in doubling its overall operating margin from 12.5% in 2006 to almost 28% in 2008. That's impressive and part of the reason why revenues grew from $506 million in 2002 to an estimated $1.2 billion in 2008 and operating income from $29 million in 2002 to an estimated $323 million in 2008. With infrastructure projects expected worldwide, this growth phase appears likely to continue.
Bottom Line
At a time when strong balance sheets are critical to a businesses survival, it reduced net debt by $285 million (69%) in just one-year, ended September 30, 2008. Despite all the good news, its stock is down 44% in the past 52-weeks. As I said, Graftech bends but it doesn't break.
IN PICTURES: How To Make Your First $1 Million
Results Are Good
It announced third quarter earnings in early November and net sales were up 26% to $316 million from $251 million year-over-year, and operating income grew 57% to $87 million from $55 million in the same quarter of 2007. Most impressively, its operating margin increased by 550 basis points to 27.5%, helping to produce cash flow in the first nine months of $171 million, more than double the same period a year earlier. As a result, it was able to reduce net debt by $285 million, which in turn cut interest expenses by more than 50% to less than $13 million.
The industrial materials division, Graftech's primary source of revenue, saw third quarter sales increase by 24% to $266 million from $215 million in 2007. Operating income increased 43% to $74 million, up from $52 million a year earlier. Its engineered solutions division witnessed a sales improvement of 39% to $50 million from $36 million a year earlier and most importantly, its operating income improved almost 400% to $13 million from $3 million in 2007. (Learn how to gather all the pieces before you start to put together your puzzle, read The Flow Of Company Information.)
In its third quarter press release, it indicated that the fourth quarter and 2009 would be challenging due to the global recession. It went on to say EAF steel production would be down in the fourth quarter. Due to this slowdown, it revised its full-year numbers for 2008 downward indicating sales would increase 18% to 20%, operating income 35% to between $315 million and $330 million with cash flow from operations increasing to $210 million, up from previous guidance of $190 million. (Explore the controversies surrounding companies commenting on their forward-looking expectations, check out Can Earnings Guidance Accurately Predict The Future?)
Despite its caution, these numbers seem awfully strong. KeyBank Capital Markets' Mark Parr, head of its equity research department, recommended back in December buying several steel stocks including Nucor (NYSE:NUE), Reliance Steel (NYSE:RS) and Cliffs Natural Resources (NYSE:CLF). While it is an endorsement of the industry itself, most important is the fact Parr and his firm both own stock in Graftech.
It's Come So Far
While 85% of revenue comes from industrial materials, such as graphite electrodes, the remaining 15% that comes from advanced graphite materials and other engineered solutions. This is what has made the difference in its profitability. In three short years, its operating margin for engineered solutions grew from 1.7% in 2006 to 22.1% for the first nine months of 2008. That's been a key factor in doubling its overall operating margin from 12.5% in 2006 to almost 28% in 2008. That's impressive and part of the reason why revenues grew from $506 million in 2002 to an estimated $1.2 billion in 2008 and operating income from $29 million in 2002 to an estimated $323 million in 2008. With infrastructure projects expected worldwide, this growth phase appears likely to continue.
Bottom Line
At a time when strong balance sheets are critical to a businesses survival, it reduced net debt by $285 million (69%) in just one-year, ended September 30, 2008. Despite all the good news, its stock is down 44% in the past 52-weeks. As I said, Graftech bends but it doesn't break.
by
Will Ashworth
Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.
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