Calgon Carbon: Operational Enhancements And Target Market Growth Could Drive 200% Upside Potential

About: Calgon Carbon Corporation (CCC-OLD)
by: Tom Shaughnessy

Executive Introduction:

Calgon Carbon Corporation (NYSE:CCC-OLD) is the world's largest producer of granular activated carbon and supplies for more than 100 types of activated carbon products (in granular, powdered, pelletized and cloth form) for more than 700 distinct applications. The company employs 1,100 people in more than 15 manufacturing, reactivation and equipment facilities across the U.S., Asia and Europe. Calgon Carbon is known as Chemviron in Europe and has over 27 sales and service centers throughout the world. The company describes itself as follows:

Calgon Carbon Corporation is a global leader in innovative solutions, high quality products and reliable services designed to protect human health and the environment from harmful contaminants in water, and air. As a leading manufacturer of activated carbon, with broad capabilities in ultraviolet light disinfection, the Company provides purification solutions for drinking water, wastewater, pollution abatement, and a variety of industrial and commercial manufacturing processes.

Calgon Carbon has been a stable play, albeit a somewhat uneventful one. With a share price currently at $20.58 and a 52-week range of $13.86 to $21.00, investors could be thinking that Calgon Carbon has reached its peak. But from a long-term viewpoint there is still more value to be achieved with Calgon Carbon.

Recently on December 13, 2013 the company provided an update to shareholders that will be the key basis for this discussion. Management's update is infused with serious operational improvements that will enhance shareholder value moving forward, thus making Calgon Carbon a clean and attractive investment. Calgon Carbon's key operational enhancements including share buybacks and cost improvements will directly increase shareholder value while target market growth will drive future operational success.

Investment Thesis:

  • Why does management have to make changes at Calgon Carbon?
  • Recently announced operational enhancements aiming to boost shareholder value including $150 million in additional buybacks and $40 million in cost reductions.
  • The effects of these operational enhancements on shares for the future, including 200% of upside potential by 2016.
  • Buybacks can happen sooner based on management's history with buybacks providing for a short term catalyst.
  • Growth in the target markets that Calgon Carbon serves including activated carbon, drinking water treatment, environmental water treatment, environmental air treatment, food & beverage, industrial processes and specialty markets will feed future growth for the company's divisions.
  • Company growth and expansion to keep up with the growth in the various target markets served.
  • An explanation of the cost reductions Calgon Carbon has set forth.
  • Innovation at Calgon Carbon sets it apart from its competitors.
  • Mercury removal is a huge opportunity for Calgon Carbon moving forward.
  • Growth in the mercury removal market for activated carbon could drive growth for Calgon Carbon's activated carbon.
  • Growth in Calgon Carbon's key served markets can provide increased sales and revenue for the company moving forward. These key markets include disinfection byproducts and ballast water treatment specifically.
  • Calgon Carbon's plan for creating shareholder value moving forward.
  • High institutional ownership demonstrates institutions' stability in their investment in Calgon Carbon.
  • Risks.
  • Conclusion.

Why Does Management Have To Make Changes At Calgon Carbon?

Calgon Carbon has had a rocky past four quarters. As can be seen from the quarter ending December 31, 2012 to March 31, 2013, Calgon's cash flows are severely impacted by expenses and liabilities. Capital expenditures have been on the decline although cash flow from investing activities is still negative. Cash flow from financing activities is also negative, although somewhat improving.

The company's financials are hit or miss. Looking at the quarter ended December 31, 2012, total cash from operational activities was a blowout positive while cash flows from investing activities and financing were the worst in the past four quarters.

Calgon Carbon's new President and CEO Randy Dearth took his position nearly 15 months ago and is looking to stabilize the company for future growth. The above data includes the new CEO's watch, so it is important to look at Calgon Carbon before his appointment.

Looking at the company before Mr. Dearth's appointment on a YoY basis, Calgon's revenues were up. This does not portray the entire picture as Calgon's operating income and net income are all down. Calgon Carbon was due for a new CEO to turn the company around.

Although the first picture of the company's cash flows is not the brightest, it does demonstrate improvements and increasing stability through the appointment of the company's new CEO. This is due to the fact that those four quarters all took place during Mr. Dearth's oversight. This increased stability can be seen from the company's most recent quarter ending Sep 30, 2013 compared to the quarter ending June 30, 2013. Here we can see a more or less stabilization of cash flows from investing activities, capital expenditures remaining constant, the most positive change in cash equivalents during the four quarters, solid increases in cash flows from operational activities and slight increases in net income. Overall, Calgon Carbon has had poor financial performance on a YoY basis, although the company's new CEO is stabilizing and improving the company during his tenure that can be seen in the company's QoQ statement of cash flows. This improvement is set to take the next huge leg up with Calgon's recent update to shareholders ripe with changes to boost shareholder value.

Recent Changes Aiming To Boost Shareholder Value:

Calgon's recent update to shareholders includes some very positive operational updates aiming at increasing operational efficiency and shareholder value to expand upon Mr. Dearth's transformation of the company. To start, Calgon Carbon has decided that it will not make the change to a Master Limited Partnership or MLP structure. This is beneficial for shareholders due to the fact that Evercore Group, LLC and Morgan Stanley both concluded that the change would not be accretive to shareholders. This event also speaks to management's drive to explore all opportunities to increase shareholder value - an effective management team.

Calgon Carbon also decided to increase its stock repurchase plan by $100 million, bringing the total amount of repurchase to $200 million since last November. Of this amount, $150 million is still available for repurchase. Calgon has stated that the company's board has authorized the company to complete the company through the open market or through an accelerated option under the terms of a rule 10b5-1 plan. Seeing a company authorize such a large repurchase plan, (almost 20% in total of the company's value) is an extremely positive event. Being just over a billion-dollar company, a 20% repurchase would increase shareholder value significantly moving forward.

One of the key roadblocks to Calgon Carbon increasing the bottom line is the cost of revenue that has been relatively stable over the past four quarters. During its update, Calgon Carbon stated a $10 million expansion of the Company's cost reduction program for a total of $40 million in total annual cost improvements. Calgon Carbon's huge share repurchase plan, coupled with its cost reduction plan will significantly improve shareholder value moving forward.

Effects Of The Operational Enhancements:

Looking at the cost of revenue, the numbers for the past four quarters are relatively stable. Calgon is expecting to realize improvements of $30 million in 2015 and the full $40 million in 2016. This annual reduction will increase the company's bottom line significantly.

Calgon Carbon's $150 million dollar share repurchase plan coupled with $40 million in cost of revenue reductions will significantly add to the company's bottom line. I expect shares of Calgon Carbon to be valued at $63.27 or 200% higher than current levels in 2016. The above model uses a conservative 5% revenue growth with a $30 million reduction in cost of revenue by 2015 and the full $40 million by 2016 as stated by management. I have projected a 2% yearly growth in operational expenses and a decrease of the smaller other income and net expenses of 5% per year. Using the company's effective tax rate of 37.67% seen in 2012 is conservative as there are no projected decreases in effective taxes for the company throughout the model.

Moving down to shares outstanding, Calgon Carbon already instituted $50 million of its share repurchase plan. began the $150 million in share repurchases or 13% of the current market capitalization from 2013 on to 2016. The first portion of these repurchases is projected in this model of starting in 2014. Decreasing the amount of outstanding shares by a significant amount increases Calgon Carbon's EPS by a large amount. I am projecting an EPS of $2.46 in 2016 and a share price of $63.27 using the company's current P/E ratio.

This Will Happen Sooner Rather Than Later:

Calgon Carbon has already instated $50 million of buybacks in 2012 through an accelerated share repurchase plan. Seeing a company that is not putting off share repurchases and following through with its repurchase plan is an extremely positive event.

The Board's authorization will permit the Company to complete repurchases on the open market or otherwise, including through an accelerated share repurchase, under the terms of a Rule 10b5-1 plan in privately negotiated transactions and in round lot or block transactions.

It is positive due to the fact that shareholder value and EPS on a comparable base increases due to the decrease in the number of outstanding shares. Moreover, using an accelerated plan in the past increases the likelihood that the company will accelerate its current planned buybacks as well. My projections tier the buybacks over the course of 2013-2016 after the $50 million in buybacks decreased the share count in 2013 over 2012 already. The $150 million in buybacks can happen much sooner than 2016 as seen by the company's past executions and could increase shareholder value sooner rather than later. The company has also stated that any repurchases will not impede the company's ability to fund other strategic investments as they build for the future.

The Company: Products and Solutions Growth

The 5% yearly revenue growth in my projections is conservative and are meant to point out the increase in the bottom line through the decreases in the cost of revenue and the amount of shares outstanding. On the other hand, Calgon Carbon's product and solutions are strong and growing and may in fact increase revenue by amounts larger than projected.

The water purification market is a growing area of concern on a global scale. Whether it is the increased need for activated carbon in established water utilities across the United States or ultraviolet light disinfection technologies to eradicate microbes. All investor presentation slides used in this article can be found at Calgon Carbon's investor relations website.

Calgon Carbon's products and services include:

  1. Activated Carbon & Specialty Products
  2. Activated Carbon Reactivation/Recycling
  3. Ion Exchange Technology Systems
  4. Activated Carbon Adsorption Equipment
  5. Ultraviolet Technologies
  6. Services

Calgon Carbon's key target is set to see 10.8% compounded annual growth through 2017. This equates to 4.5 billion pounds being demanded in 2017 versus the 2.7 billion pounds demanded in 2012. My conservative revenue growth used in my model is less than half of the projected growth demand for Calgon Carbon's key product - activated Carbon.

Although activated Carbon is the company's key product, it is not used for only one market. Calgon Carbon serves six key markets that are all attractive growth targets for the company moving forward.

Drinking water is a market that I watch very closely and am extremely interested in. Calgon Carbon is targeting drinking water treatment as the need for UV and activated carbon and is set to grow moving forward. The company offers a product portfolio and reactivation and complementary equipment to serve the market. Keep in mind that water is used for everything, from making jeans to microchips to being essential to the functioning of a person's brain, and the growing need for water purification in a more and more polluted world is necessary.

Calgon Carbon is targeting the $28 billion dollar environmental water treatment market as well. Regulations drive higher sales and Calgon Carbon is established as its products and services coincide with regulations and emerging economies.

Air treatment is a market that is less thought of than water purification, although it is a very attractive market. Increasing regulations on mercury in the U.S., DSDN globally and pressure to keep up with standards will drive Calgon Carbon's innovative controls in the air treatment market.

Calgon Carbon is targeting the food & beverage market as it provides a stable and secure revenue stream as the company is established in the market.

The industrial processes market is extremely attractive for Calgon Carbon. The company's cost-effective solutions on a global scale will see increased demand from process requirements and the bundling of product offerings and services in the market.

Calgon's specialty target market is one of the highest margin and highest growth markets for the company. Through industry leading R&D, the company is able to provide customers with unique applications with high margins for Calgon Carbon.

Company Growth and Expansion:

Calgon Carbon is not just cranking up production at its outstanding sites to keep up with demand. The company is opening up new facilities to meet demand and provide higher output for the company. One such facility is Gila Bend. Opened this year (under budget), it has a capacity of 25 million lbs/yr and serves the need for reactivated carbon for water treatment facilities throughout the greater Phoenix area and throughout the entire western U.S.

Calgon Carbon has been so successful in part due to its carbon reactivation services. This is due to the fact that reactivated carbon is cheaper than repurchase of virgin carbon. Customers can reactivate their previously purchased carbon more cheaply than repurchasing. Calgon heats the carbon to reactivate it, to destroy all of the existing absorbed material, so the carbon is reusable. This means that the carbon does not have to be landfilled so it does not build up in the environment and activating has a lower cost than incineration. Reactivating carbon is also attractive as it produces only 20% of the CO2 versus he production of virgin carbon.

The reactivation market for carbon is growing, and Calgon Carbon's growing reactivation capacity is increasing to keep up with the market.

This growth in the company's reactivation capacity stems from the growth in facilities that serve this market. Calgon Carbon has four major recent reactivation contracts in the U.S. and abroad. The company has also converted more than 70 water treatment facilities to custom municipal reactivation.

Cost Improvements:

Calgon Carbon's cost reduction plans are not just a hope. The company has events in line to meet the reductions that focus on optimization of existing projects and spending cuts for research and development among other plans.


Innovative solutions can offer a moat for a company that sets it apart from other providers. Calgon Carbon offers unique products and services in established countries such as the U.S. while targeting emerging markets in Brazil and China for their services and Japan and China for their FLUEPAC products.

Mercury Removal: A Huge Opportunity For Calgon Carbon

Calgon Carbon is benefiting from the growing demand for mercury removal as 19 states in the U.S. already have mercury regulations. With initial compliance in 2015, Calgon Carbon's mercury removal products and services will see increased demand for their advanced powdered activated carbon products set to target the market. The cost of these products for the customer is not expensive and cost 700k to $1MM a unit.

Calgon Carbon has unique products that set the company very far ahead of the competition. Its FLUEPAC product line for mercury removal offers a tiered product line that can meet the needs for any size customer or any quality standards.

Calgon Carbon's FLUEPAC MC+ product outperforms the competitor's product in the area of mercury removal. Calgon Carbon's advanced products have also been top performers in 22 full-scale trials. These are particularly very effective when SO3 is present.

Looking at another case study, Calgon Carbon's FLUEPAC MC+ product outperforms the competition.

Calgon Carbon also obtained patents on its products to protect them from being stolen by competitors and to protect the company's innovations while setting them apart from the competition.

The Mercury Market Itself:

The estimated mercury market size for activated carbon demand could double through 2017. Calgon Carbon is a direct beneficiary as they provide the activated carbon used in their mercury removal products.

Calgon Carbon is expecting to be the beneficiary of the mercury removal market from Q4 of 2013 to Q2 of 2014 (this provides another reason to initiate an investment in Calgon Carbon immediately, ahead of the huge demand growth for activated carbon with regard to mercury removal in the coming quarter). This is due to the fact that Calgon Carbon provides unqiue solutions targeting the Mercury removal market.

Disinfection Byproducts Market: Another Growth Market For Calgon Carbon

In 1998 and again in 2005 the U.S. set regulations to limit the amount of disinfection byproducts allowed in drinking water. This market provides an opportunity for Calgon Carbon since the company's high quality activated carbon removes precursor compounds, offers a non-chemical alternative to chloramines commonly seen in water treatment facilities and the company has NSF-certified reactivation facilities.

When organic matter reacts with chlorine disinfection byproducts are formed and can be harmful to those drinking the water. Two of the key regulations enacted were to remove precursor compounds through activated carbon and the substitution of alternative disinfectants other than chlorine that lower the total amount of disinfection byproducts.

The regulatory timeline for disinfection byproducts is in full swing and Calgon Carbon will continue to benefit from the regulatory growth in relation to DBP limitations.

Calgon Carbon's activated carbon offers many advantages over chloramines that include protection against endocrine disruptors and pharmaceuticals while not hurting plumbing or causing unsatisfactory water taste. Protection against pharmaceuticals and endocrine disruptors is very, very compelling as the drugs and chemicals people take and use all end up in the water supply. If someone upstream takes a Prozac and it is not cleaned out of the water, someone downstream will get a piece of that drug. Although extremely minute, in a global world of drugs and chemicals these can bioaccumulate and biomagnify in a person.

The regulations in the DBP market are increasing the need for activated carbon moving forward.

Major water utilities that are currently using chloramines for disinfection may be affected by DBP regulations that will increase the need for activated carbon. Calgon Carbon has been highly successful in this market as the company offers high quality activated carbon, has reactivation facilities and has been successful in converting 70 facilities to custom reactivation in the last four years.

Ballast Water Treatment: Another Growing Target Market

Calgon Carbon is set to benefit from the growing need of ballast water treatment or BWT for short. This practice is needed to prevent the spread of invasive species from port to port and to improve environmental protection.

Pending regulations is set to increase the demand for ballast water treatment globally. This would in turn benefit Calgon Carbon's products that serve this market.

Calgon Carbon's Hyde Marine segment features the Hyde GUARDIAN filter and UV reactor that has seen approvals across the board.

These approvals extend to the United States Coast Guard, a large target market for Hyde Marine.

Excluding the last quarter of 2013, Calgon Carbon has seen increasing Hyde Marine orders on a YoY basis.

The Global ballast water treatment market is large and Calgon Carbon is targeting this market specifically.

Calgon Carbon's division, Hyde Marine, is estimating the total ballast water market size at $28 billion moving forward. This is a huge opportunity and target market for Calgon Carbon and should not be brushed off as a side division.

Calgon Carbon is targeting many different types of customers for its ballast water treatment solutions by Hyde Marine including yachts, container ships, tankers, general cargo ships, OSV, cruise ships and ferries.

Calgon Carbon's innovation moat is seen once again in the company's ballast water treatment division. In comparison to UV and non-UV systems, Hyde Marine comes out ahead.

Calgon Carbon's Value Creation Moving Forward.

Calgon Carbon is continually improving shareholder value over time with a set plan in place to do so in the future. For example, net sales less cost of products sold before deprecation and amortization has leveled off at 33.3% in Q3 2013 from 33% in Q2 2013. This level off is exciting as it was up largely from 27.3% in Q3 2012 and has level off due to cost improvements.

Calgon Carbon has also seen four years of decreasing operating expenses. This demonstrates the company's drive to decrease operating expenses moving forward.

  1. 2009: 17.9%
  2. 2010: 17.6%
  3. 2011: 17.5%
  4. 2012: 16.6%
  5. 2013 (first nine months): 14.6%

Calgon carbon is also seeing an increase in its EBITDA margin that will continue to improve due to the cost reduction plans that have been put in place.

Through a better understanding of its inventory Calgon Carbon has been better able to rationalize its products and optimize its plans for the most efficient output.

Institutional Ownership:

Calgon Carbon has a very high institutional ownership with 96% of shares being held by institutional and mutual fund owners. This speaks to institutions' stability in their investment in Calgon Carbon moving forward and their satisfaction with management's executions and future events.

Risks To Calgon Carbon:

There are several risks that could affect Calgon Carbon that potential and current investors should be aware of before investment. Any delays in regulatory approvals could push off sales linked to regulatory requirements until later dates. This would not affect long-term investors although it would affect the bottom line if delayed.

Being a global company, unfavorable foreign exchange rates can also affect Calgon Carbon. Moreover, the availability and pricing of coal could be a potential risk to Calgon Carbon moving forward. Understanding these risks is key to being an educated investor in Calgon Carbon.

On a one-year basis, Calgon Carbon is up significantly from $14.13. It may serve investors well to wait for a slight pullback before initiating an investment to capture the long-term potential of the company. This would be more of a trading viewpoint and this article deals with the long-term investment in the company.


Calgon Carbon is a leader in the global activated carbon market and is set to see growth in several of its target markets. These markets include activated carbon overall, mercury removal, ballast water treatment and disinfection by products. The company's innovation and effective products and services set it apart from competitors that creates an innovational moat for Calgon Carbon.

Looking at the water market overall, Calgon Carbon is quite specialized compared to other companies water investors are in such as American Water Works (NYSE:AWK) and Xylem (NYSE:XYL). These two names are well known as being well established. American Water works provides a nice dividend and a stable water business and Xylem is solving water problems globally across a wide array of products. Investment in these companies is enticing although investing in Calgon Carbon offers a unique and attractive opportunity. Calgon Carbon is a generally un-followed company to retail investors and deserves a look as an investment opportunity.

Calgon Carbon's drive to repurchase an additional $150 million in shares coupled with a $40 million in costs reduction will increase the company's bottom line significantly. This is all the while using a conservative estimate for revenue growth at 5% that is likely under the realistic growth rate due to the future demands projected for Calgon Carbon's served target markets. As such, I expect shares of Calgon Carbon to be valued at $63.27 or 200% higher than current levels in 2016. Keep in mind that my revenue model uses conservative 5% YoY growth and is meant to show the key effects of cost reductions and share repurchases.

These share repurchases may be seen earlier over the course of 2016 due to Calgon Carbon's past executions. This can increase shareholder value sooner rather than later. Investors should be aware of the risks associated with investing in Calgon Carbon that include unfavorable exchange rates, regulatory actions being delayed and the availability and pricing of coal in the future.

Calgon Carbon offers, in a way, a pure play, clean investment. The company targets the purification of water in many key growth areas. The company also targets the air purification market through the removal of contaminants such as mercury. The ballast water treatment market is set to grow in the coming years and Calgon Carbon targets this market uniquely and effectively as well. Calgon Carbon is a very exciting investment that long-term investors will benefit from through 2016.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CCC-OLD over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Always do your on research and contact an investment professional before executing any trades. This article is informational and in my own personal opinion. All trademarks, slides and statistics are owned by Calgon Carbon corporation.