GrafTech International Ltd. (EAF - $11.62 - NYSE) (EAF, Financial) is a leading manufacturer of graphite electrodes used in electric arc furnaces that produce steel. GrafTech has not lived up to our expectations as the company continues to work through a set of issues from higher channel inventories driving spot electrode prices lower, higher prices for key raw ingredient petroleum needle coke, and general economic worries. The company is better insulated from the increased needle coke costs due to its captive supply covering roughly 2/3 of its production, but the lower spot prices for electrodes has raised concerns about the stability of GrafTech’s long-term fixed priced sales agreements should spot prices drop below contract. The shares received a boost late in the quarter on speculation that GrafTech might be an acquisition target given its cheap valuation (under 5x 2020 P/E and 5x 2020 EV/EBITDA). Instead, controlling shareholder Brookfield Asset Management announced a secondary offering selling down its ownership stalke, further pressuring the stock. Partially offsetting this was the company announcing a $250 million stock buyback in conjunction with Brookfield’s secondary. We anticipate additional repurchases by GrafTech given its strong cash flow characteristics and management’s stated target of returning 50% - 60% of free cash flow to shareholders. The concerns surrounding electrode spot prices should subside as the industry works through channel inventories over 2020.
From Keeley Asset Management's Keeley Small-Mid Cap Value Fund fourth-quarter 2019 shareholder commentary.
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