Zacks' Bear Of The Day: GrafTech
Oct. 17, 2014 8:23 PM ET
Earnings estimates have been plummeting for GrafTech (GTI) lately. The company lowered its full year EBITDA guidance twice within two months, prompting analysts to revise their earnings estimates significantly lower.
This sent the stock to a Zacks Rank #5 (Strong Sell).
While shares of GrafTech have sold off heavily lately, it still doesn't look like much of a value at 20x next year's earnings. Investors should consider avoiding this stock for now.
GrafTech International offers graphite material solutions for a wide range of industries and end markets, including steel manufacturing, advanced energy applications and electronics.
Second Quarter Results & Updated Guidance
GrafTech delivered disappointing second quarter results back on July 29. Net sales dropped 6% to $284 million, driven by an 11% decline in the "Industrial Materials" segment due to weaker graphite electrode realized pricing and lower needle coke sales volume. This was somewhat offset by an 11% in the smaller "Engineered Solutions" segment, which saw higher sales volumes in advanced consumer electronics and high temperature furnace applications.
Adjusted earnings per share came in at a loss of -$0.05, which was well below the Zacks Consensus Estimate of +$0.01.
Following the disappointing Q2 results, management lowered its full year adjusted EBITDA guidance from a range of $150 million-$180 million to $135 million-$150 million. Less than two months later, on September 23, the company lowered its guidance again. Management now expects full year adjusted EBITDA of $105 million-$115 million.
CEO Joel Hawthorne stated that they "continue to face a challenging and volatile operating environment in both our Engineered Solutions and Industrial Materials segments."
Estimates Plunging
Following both guidance reductions from management, analysts revised their earnings estimates significantly lower for GrafTech. This sent the stock to a Zacks Rank #5 (Strong Sell)
The 2014 Zacks Consensus Estimate is now -$0.11, down from +$0.14 just 90 days ago. The 2015 consensus is currently $0.22, down from $0.41 over the same period.
Valuation
While shares of GTI have sold off heavily since the Q2 report, it still doesn't look like a value here. The stock trades at 27x 12-month forward earnings and 20x the 2015 consensus. And its enterprise value to EBITDA ratio of 6.4 is essentially in-line with the industry median.
The Bottom Line
Given the challenging operating environment, continued reductions in guidance, negative earnings momentum and its valuation, investors should avoid GrafTech for now.
