Cytec Industries (CYT, Financial) is one of the top holdings of Passport Capital, a $3.5 billion fund founded by John Burbank (Trades, Portfolio). In its latest investor letter John explained his investment thesis on the company. Below is the excerpt from his investor letter.
"Cytec ("CYT") is one of the few companies approved to produce aerospace-grade carbon fiber and is one of three main suppliers of The Boeing Company's (BA, Financial) and the Airbus' (AIR, Financial) new composite planes like the 787 Dreamliner and the Airbus A350. Each of these planes are composed of approximately 50% carbon fiber by weight. For reference, legacy aircraft builds are comprised of only 5%-20% carbon fiber by weight. The thesis for our investment has been the shift to carbon fiber to reduce fuel costs and improve passenger comfort in new aircraft. Because of significant backlog of airplane builds (approximately seven years), carbon fiber demand is less dependent on GDP growth. CYT is also the primary supplier for the F-35 Joint Strike Fighter, which Passport estimates could result in over $3 billion in revenue to CYT if the planned 3,000 + planes are produced. Recent technology breakthroughs and a positive outlook for the U.S. defense budget have put this program in a significant better light, and production and orders are ramping significantly.
We are also constructive on the company's earnings growth due to the demand created by new aircraft, and other products that are or are seeking to be more carbon fiber intensive such as automobiles. The auto industry is in a rush to shed vehicle weight to comply with CO2 emission regulations, and carbon fiber can be a large part of the solution. We believe a major win in the automobile space could be announced in 2015 for a luxury car with $200k + price tag. Passport estimates that this class of auto would be 10x the size of the aerospace market, but still support the margins that make it attractive to CYT. The 2015 consensus EPS is approximately 5% below Passport estimates and CYT still is reflecting a multiple significantly below its peers. We believe continued execution and visibility will help close this gap."
Cytec is trading at 16.22 times FY2015 EPS and has a dividend yield of 0.90%. Its EPS estimates for the current year is 3.21 and next year is 3.71. According to sell side estimates, the company's top line is expected to grow 5.80% in the current year and 7.80% next year. Out of 11 analysts covering the company, seven are positive and have buy ratings, and four have hold ratings.
