Cabot Corporation (NYSE:CBT) is one of those businesses I've been writing about for some time - but that in fact hasn't been updated in several years at this point. That is about to change.
In my last article, I took a "HOLD" stance and rotated some profits. This turned out to be the short-term right choice because, in a short time after that article, Cabot plunged in share price. However, the macro environment and trends ensured that after this, Cabot turned to outperformance and has seen a 42% total RoR since my last article in late 2019.
Let's revisit this business.
For more detailed information on the company's basics, I refer you to my original articles on the company. There I go through the basics and what the company does.
For now, let's update the results, with a first quick glance at the business specifics. The company, after all, has a 50-year consecutive dividend history, even if that history includes cuts.
1Q22 was a continuation of the well-established, solid FY21 which saw company results rise to very high levels.
For the quarter, the company saw close to double-digit EPS growth rates, with over $70M of FCF and almost $180M of available cash, as well as over $1.2B in liquidity at a net debt/EBITDA of 1.8X. This means that the company has no near-term cash or liquidity issues, and is very well-capitalized. The earnings growth recorded by Cabot for the first quarter was very broad-based.
The company's solid market position in Reinforcing and Speciality Carbons as well as Fumed Metal Oxides means that Cabot is extremely well-positioned to capitalize on current macro trends, including battery materials, car components, and inks colorants and elastomer composites used around the world. The company is market-leading in most of its segments, illustrated here by Reinforcement materials.
The company refers to an unparalleled China position with experience dating back nearly 35 years, which has driven profitability of 18% CAGR since its inception, and currently encompasses a wide range of production operations and selling operations in China.
Cabot is correlated to GDP growth and macro to a certain degree. Trends that Cabot can capitalize on include things like the EV shift, lightweight vehicles overall, sensors to enhance capacity and safety, the increasing general circularity of supply chains, the digitization of society, and the global upgrade of existing power infrastructure that seems to be ongoing.
The company offers everything from Battery materials, specialty materials for EM shielding, tire solutions, fumed silica for structural adhesives used in wind turbines, ESG-friendly carbon for dope-dyed fiber, inkjet colorants for packaging, specialty carbons for high-res display and touchscreens, and power cable carbons.
In short, what makes our modern world tick, is supplied by Cabot Corporation.
The company's historical trends since 2015 have been very impressive, including both a reduction in shares outstanding, as well as cumulative dividends and overall share price repurchases.
Fundamentally speaking, the company's maturity profile for its debt is well-laddered with some $300M coming due in 2022. The company has recently announced a 6% dividend increase, announced $19M worth of share repurchases, and recently announced an M&A of a Chinese bank in order to support Battery Materials growth. The company believes that the next few years will bring incredible results to such investments.
There is continued momentum in Battery Materials, with an ever-growing demand for exactly these types of products. I don't like using TAM as an indicator for anything, but the fact is that the world is seeing a higher and higher need for such materials going forward. This is underbuilt by strong 1Q22 volume growth, as well as the company being one of the broadest-spectrum additive producers on the markets.
For some of the company's other segments, you'd be surprised at the upsides we're able to calculate. When you think inkjet/inks, you might think printers. But this isn't really what we're talking about - at least not photo jet printers.
Simply put, the company is focusing on products and technology as well as sales areas that they consider to be crucial for the technologies of tomorrow, called high growth vectors while maintaining its core focus. This is a change from the company's legacy approach, where the so-called high growth vectors were a very small part of sales, as opposed to a majority of it.
The current market, despite current negative trends, supports such a development. That's also why the company hasn't been dropping as much as broader indexes, and why the position I have remaining is one of the positions that's very much in the positive for 2022 YTD.
The company also expects this growth to continue. Cabot mentions supportive markets and positive macro, even with Russia/Ukraine, and guides for expected volume growth moving forward in performance chemicals with double-digit growth rates. This is nothing next to growth vectors, which are expected to grow over 50%.
What this means is that Cabot is in a very good position to take advantage of near-term market opportunities.
With that, we look at the valuation for Cabot Corporation. There's a massive upside to this company not only based on the growth of EPS but on a value reversion to a 15X P/E multiple. Based on this alone, the combined reversion and growth upside to 2024E calls for almost 30% annually, with a total 3-year RoR of 81%.
This alone should be enough, I believe, to pique your interest in a company such as this, especially once you start looking at the recent trends of share price decline due to overall stock market pressure.
This company isn't dirt-cheap. It's undervalued, but it could, of course, drop lower than we're currently seeing. But upside is solid and well-established, as I see it. While analyst accuracy isn't perfect, it's more than 50% here both on a 1-year and 2-year forecast basis with a 10% margin of error. I would also like to remind you that aside from the pandemic drop in 2019-2020, this company's earnings trends have been absolutely stellar. Outside of the pandemic, this company has been as high as 16-18X before, which would call for upsides of almost 38% annually if such a premium was to be revisited by Cabot.
S&P Global analysts are equally positive on this company at this time. 6 analysts give the company a target range of $65 up to $88 with an average of $82.5, giving us an upside of 27% here, depicting that annual sort of upside I see. Also, all but one analyst does have a "BUY" or "Outperform" rating on the company here, so conviction for this investment is high.
I can't help but agree with the analysts here. Cabot's transformation and focus on its growth vectors over the past few years has resulted in a company that's in a superb position to capitalize not on momentary or temporary trends, but on fundamental changes in society. That's why I'm bullish here. It doesn't matter what company makes the products, such as the cars or the screens, they will have to source their raw materials from companies exactly like Cabot.
That's why I have a preference for investing as "low" on the value chain as possible, with the possible exception of miners themselves. While these investments come with their own risks, it insulates them from the risks we see by investing in the company that makes the gadget, only to see its market position being dislodged.
I'm here to make money, not to show brand/company loyalty. Cabot makes the "stuff" that companies need - it doesn't matter what company makes the gadget.
This is what I like, and combined with investment-grade credit, a decent 2%+ yield, and an upside of over 25% here, I'm a "BUY" on Cabot Corporation.
My thesis on Cabot is:
Remember, I'm all about:
This company also fulfills several of my investment criteria and does bear watching.
Thank you for reading.
This article was written by
36 year old DGI investor/senior analyst in private portfolio management for a select number of clients in Sweden. Invests in USA, Canada, Germany, Scandinavia, France, UK, BeNeLux. My aim is to only buy undervalued/fairly valued stocks and to be an authority on value investments as well as related topics.
I am a contributor for iREIT on Alpha as well as Dividend Kings here on Seeking Alpha and work as a Senior Research Analyst for Wide Moat Research LLC.
Disclosure: I/we have a beneficial long position in the shares of CBT either through stock ownership, options, or other derivatives. 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: While this article may sound like financial advice, please observe that the author is not a CFA or in any way licensed to give financial advice. It may be structured as such, but it is not financial advice. Investors are required and expected to do their own due diligence and research prior to any investment. Short-term trading, options trading/investment and futures trading are potentially extremely risky investment styles. They generally are not appropriate for someone with limited capital, limited investment experience, or a lack of understanding for the necessary risk tolerance involved.
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