CBT is a $3bn US based specialty chemicals and performance materials company. The company is a leading provider of rubber and specialty carbons, activated carbon, inkjet colorants, cesium formate drilling fluids, fumed silica, and aerogel. Historically, CBT delivered a robust 9.1% EPS growth over the past 5 years; despite the 4.9% YoY decline in sales mainly due to pricing pressure, product mix and currency headwinds. AAL reported positive 8.5% profit margin in FY16, driven by gross and operating margin which came in at 25.2% and 12.7% respectively. This year EPS growth was staggering 144.1% YoY, primarily driven by last year’s asset and goodwill impairment charges which resulted into a low base.
In terms of financial leverage, CBT has a low Total Debt/Equity ratio of 0.7x vs. long-term average of 0.5x. We believe, the present low leverage position will benefit CBT further, if they plan to tap on end-market opportunities by relying on debt funding options. This implies, CBT has further potential to increase ROE from its impressive 17.4% at present. Other return ratios such as ROA (7.3%) and ROI (9.7%) looks robust and portrays CBT’s sturdy business fundamentals in place. Furthermore, expected EPS growth of 9.3% YoY over the next five years vs. -3.2% CAGR in the past boosts business outlook going forward.
At $51.2, CBT is trading at a trailing P/E of 14.4x. After witnessing a 144.1% surge in share price over the last one year, the stock is currently trading at a forward P/E of 13.7x with Price to Earnings growth (PEG) ratio of 1.6x. We believe, the PEG ratio is reasonable compared to the street’s estimated earnings growth. However, other valuation ratios like P/S and P/B seems to be stable at 1.2x and 2.3x respectively. Important to note that the higher P/B ratio combined with higher P/Cash is indicative of the company’s strong asset and cash position. However, P/Free Cash Flow (16.1x) looks relatively high and fails to yield any meaningful conclusion as FCF dropped significantly largely due to lower operating cash flow compared to previous year. With an analyst recommendation of 2.4, CBT presents a neutral scenario ahead.
If we introspect into the shareholding structure, CBT has a free float of 61.5mn shares; which is 99.9% of its total outstanding shares. The company has an insider ownership of 0.5% wherein insider transaction activity has declined 39.1%, reflecting an efficient stock movement based on financial performance and business strategy. Additionally, Institutional ownership is at healthy 88.1% which reflects CBT’s brightening prospects, albeit institutional transaction has declined 2%. This can be substantiated by its lower Float Short (0.8%) and Short ratio (1.4x) which means the investors hope stock will create value.
In terms of other technical trading parameters, the stock’s 200-day simple moving average is at 6.1% lower than the current market price. This implies the stock has a strong resistance at $54.3 level. Whilst in terms of volatility, CBT has a beta of 1.1x coupled with average true range of 1.06x, which reflects the price volatility is in tandem with that of the broader market index.
CBT stock has delivered weak performance over the last one year (+4.4%) and YTD (+1.3%), while last one month (-6.8%). However, if we add-up the dividend yield of 2.5%, the overall holding period return would look moderate. Furthermore, Average trading volume was at 0.4mn shares, which indicates a higher activity in the stock vs. its peer group, clearly indicated the relative volume of 1.2x. Additionally, volatility of 2.2% for this week was higher than that of month’s 1.9%. This is indicative of a surge in activity in recent times.