We came across a bearish thesis on GrafTech International Ltd. (EAF) on The Lion’s Roar – Outside the Box Investments’ Substack by Dominick D’Angelo. In this article, we will summarize the bears’ thesis on EAF. GrafTech International Ltd. (EAF)’s share was trading at $2.15 as of Nov 13th. EAF’s trailing and forward P/E were 7.12 and 6.80 respectively according to Yahoo Finance.
A miner gathering graphite samples from a mining area in Coosa County, Alabama.
Graftech’s (EAF) Q3 results reveal a strategic approach to managing liquidity amidst challenging market conditions. The company announced a new $175 million first-lien term loan, a $100 million delayed draw loan, and an extension on existing debt to 2029 without an interest rate increase, despite market rates being significantly higher. This fortuitous arrangement, with an interest rate of SOFR + 6% (10.60% as of today), exceeded expectations and should provide Graftech sufficient runway to avoid equity dilution, a major relief to shareholders. Financial projections include an anticipated FY 2024 Adjusted EBITDA of $0 million, with significant growth expected in later years, aiming for $346 million by FY 2028. Unlevered Adjusted Free Cash Flow is forecasted to turn positive in FY 2026, reaching $183 million by FY 2028, signaling potential stabilization over the longer term.
For 2025, Graftech’s volume guidance shows a projected low double-digit increase, boosted by new product offerings and a slight recovery in EAF steel utilization. However, this volume outlook fell short of expectations, particularly in light of Europe’s ongoing economic struggles, where stronger growth had been anticipated. Meanwhile, pricing trends remain concerning; Q2 prices were low at $4,300/mt, and Q3 saw a further sequential dip to $4,100/mt. This challenging pricing environment, below sustainable levels, has forced some manufacturers to idle production. Although a competitor recently announced a 20% price hike, Graftech’s management opted for selective adjustments based on geographic considerations. Given that graphite electrode prices are slow to rebound, a modest 5-10% recovery could affect Graftech’s 2025 revenue projections, with sales estimates currently at $607 million.
Looking ahead, uncertainty surrounds the impact of new EAF steel production capacity outside of China, given the current economic conditions there. China’s electrode supply glut affects regions that Graftech serves, and without a strong Chinese economy or significant shifts in China’s steel production methods, this pressure may persist. Further complicating Graftech’s future is the diminished likelihood of receiving a DOE loan for Seadrift expansion, following the company’s recent acquisition of a stake in HEG and changes in U.S. administration. Lastly, the scheduled roll-off of Graftech’s high-priced long-term agreements (LTAs) by the end of 2024 could present additional revenue and earnings challenges. As a result, the company’s near-term outlook remains uncertain, requiring a carefully monitored approach given potential volatility in both volume and pricing.
GrafTech International Ltd. (EAF) is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 13 hedge fund portfolios held EAF at the end of the second quarter which was 15 in the previous quarter. While we acknowledge the risk and potential of EAF as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than EAF but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.