The Silent EV Leader Nobody Knows–And It’s A Crazy Cheap Cash Cow

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Renewable stocks have been on a tear.

The run started when the Biden Administration introduced the Inflation Reduction Act, which included $369 billion tagged to renewables and clean energy.

I am not sure what this act is going to do for inflation, but it certainly is working to inflate stocks in the renewable sector.

To name some names, Enovix Corp (ENVX – NASDAQ), Plug Power (PLUG – NASDAQ), Enphase (ENPH – NASDAQ) all remain at or near their even as the stock market has gone into a severe tailspin.

But buying these stocks at current levels takes courage.  These are expensive names.  

They all trade at nose-bleed multiples.

It is hard for a value-oriented investor to pay the 70x PE that Enphase commands or the 16x sales for Plug Power.  Those are sky-high valuations.

I have been looking for a cheaper way.  One that lets you participate in EVs and renewables while not going down the quality ladder to a pre-revenue microcap with a blueprint and a slide deck.

I believe I have found one.  In the most unlikely of places.  I’m talking about Cabot Corp (CBT – NASDAQ).
 

MORE THAN JUST TIRES

 
Cabot Corp is in the business of carbon black.  This company is the largest producer of carbon black in the world.

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Source: Cabot Corp Investor Presentation

What is carbon black? 

Carbon black is a powdered material almost like soot.  It is the primary ingredient in paints, ink, and rubber. 

The biggest end use of carbon black is as a reinforcing and coloring additive to tires.

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Source: Cabot Corp Investor Presentation

Carbon black is a mature, slow-growing business.  The carbon black market is growing at a blockbuster rate of… drum roll please… 2-3% per year.

I know, so far, I’m not painting an exciting picture of growth.  But hear me out.  I buried the lead.

Yes, Cabot is the #1 producer of carbon black.  In fact, Cabot is #1 or #2 in a number of the markets they serve, including specialty carbon coatings and inkjet inks.

But that isn’t the story here.

The story is electric vehicles.  Cabot is a sneaky leading player in the EV battery market.

Sometimes the chart tells the story.  In this case, you immediately know there is something going on with Cabot if you compare the chart (top) to the S&P Chemical Index (bottom).

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Source: Stockwatch.com

While the Chemical Index has broken down (not surprising given the signs of recession) Cabot has bucked the trend.  It is within spitting distance of its highs.

The reason?  Cabot has turned itself into a leading producer of conductive carbon, carbon nanotubes and carbon nanostructures.

They operate through 3 facilities in China that produces carbon structures designed specifically for battery materials.  They are open to building manufacturing in the United States but right now, if you produce batteries, you do it in China. 

Each of these facilities is expanding production to meet the growing demand.

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Source: Cabot Corp Investor Presentation
 

CARBON NANOSTRUCTURES IN BATTERIES

 
Carbon nanotubes and nanostructures are relatively new introductions to battery composition. 

The battery anode has undergone several changes the last few years.  It started as a graphite anode, which had drawbacks for capacity and safety. Alloy anodes improved capacity but had drawbacks with recharging losses.  Silicon anodes are promising but they have issues with changes in volume and capacity declines during cycling.

As it turns out, introducing carbon nanostructures into these solutions balance out the weaknesses. You get a better anode, one that is safer and cycles more effectively.   The result is a better battery.

Carbon structures are used in a lithium-ion battery anodes that use silicon or metal alloys to provide big gains to performance and help stability.  

These battery anodes are next gen to the graphite anode batteries that have been used in the past.
 

CABOT’S BATTERY BUSINESS IS SMALL BUT GROWING FAST

 
Right now, battery materials are a relatively small piece of the puzzle for Cabot.  They estimate 2022 EBITDA from the segment of around $35 million.  That compares to average EBITDA estimates at the corporate level of $700 million.

But battery materials are growing much faster than the rest of the business.  Cabot is expecting a 50% topline CAGR over the next 3 years.

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Source: Positioned for Profitable Growth Investor Day Presentation

Cabot is a leader in this space.  They are delivering material to 6 of the top 8 battery companies.  They are working with these manufacturers on the next-gen battery designs.  Cabot is right in the middle of the still-evolving battery supply chain.

At the Credit Suisse Specialties and Basics Conference Cabot said that looking further out they believe this could be a $500 million revenue business in 5 years, a $1 billion business in 10 years.
 

CHEAP BUT NOT CHEAP

 
Cabot is not a microcap.  They have a market capitalization of $3.9 billion and an enterprise value of $5.2 billion.

Cabot did $3.4 billion in revenue last year and is expected to do $4.2 billion this year (can you say inflation?).  EPS is expected to grow from $5 per share to $6.20.

While the renewable names I mentioned at the start of the article trade at double- and triple-digit multiples, Cabot trades at 7.5x EV/EBITDA.  They pay a 2% dividend and based on average estimates, are forecast to yield 8% free-cash-flow in fiscal 2023.

While these numbers seem very reasonable compared to the renewable sector, this is still a big premium to the valuation of chemical peers.  For the most part, chemical stocks are trading at single digit PE’s. 

But of course, these companies are going to see their earnings get whacked by a recession and they don’t have the secular growth that Cabot’s battery material business has.

As the chart I posted illustrates, the dip buyers are out in force with Cabot.  I have little doubt that the buying pressure are investors seeing dips as an opportunity to get a foothold investment into their battery technology.

My only hold back on the stock is what happens if the recession is deep?  Cabot still relies on several commoditized products.   

As the tide turns volumes and margins could take a hit.  Can the stock hold up even in the face of this?

I’m not so sure.  It might not be the right time to buy a chemical stock.  But when the turn comes, buying one with a big secular growth driver will be the way to go.