GrafTech’s (EAF) long-term prospects look intact. Here’s why

GrafTech International Ltd. (NYSE: EAF) has maintained strong sales this year, aided by the consistent demand for graphite electrode that is used in a wide range of applications, including steel smelting and electric-vehicle manufacturing.

The Brooklyn Heights-based company’s stock slipped after it reported weaker-than-expected revenues for the second quarter of 2022. EAF has been on a losing streak for quite some time, with most of the losses coming during the recent market selloff. However, the stock looks poised to regain momentum and hit the recovery path in the coming weeks.

The Stock

The company has a good track record of returning value to shareholders through stock repurchases. Other factors that make it attractive, from an investment perspective, are strong recurring revenues and continued efforts to reduce debt. Moreover, the valuation is favorable — the stock price is unlikely to go below the current levels anytime soon.

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Read management/analysts’ comments on quarterly reports

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GrafTech reported stronger-than-expected earnings for the second quarter of 2022, as it did in each of the trailing four quarters. The company’s revenues increased 10% annually to $363.6 million. The top line, however, fell short of expectations. At $0.44 per share, adjusted earnings were up 2% year-over-year. Unadjusted profit was $114.9 million or $0.44 per share, compared to $28.17 million or $0.11 per share in the prior-year period. GrafTech generated $60 million of cash from operations and $48 million of adjusted free cash flow during the three-month period.

The company projects total capital expenditure for the full fiscal year in the range of $70 million to $80 million, which is in line with the management’s strategy of continued investment in products and service capabilities to effectively participate in the longer-term demand growth for graphite electrodes.

Divergent Trends

It is worth noting that the industry trends are divergent across geographies, with Western Europe experiencing softness, partly reflecting the economic and supply chain impact of the conflict in the Ukraine war. In contrast, the steel market in the U.S. has remained largely resilient. The conflict in Russia has resulted in a modest decrease in GrafTech’s sales of graphite electrodes to 42,000 metric tons. The war-related slump, combined with higher raw material, energy, and logistics costs, might remain a drag on the company’s bottom line in the near term.

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Commercial Metals Co. Q3 2022 Earnings Call Transcript

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Marcel Kessler, who assumed the role of the chief executive officer recently, said during his post-earnings interaction with analysts, “we continue to strengthen our commercial capabilities, and prudently manage operating and capital expenditures, and we will continue to focus on reducing our long-term debt. We will also continue to invest in our product and service capabilities to be optimally positioned to participate in the longer-term demand growth for graphite electrodes. We remain confident that the steel industry is accelerating.”

Currently trading in the single-digit territory, GrafTech’s stock has lost 44% since the beginning of the year.