I have no idea which company created the carbon fiber for this this concept car, but this photo is way cool! Today, I bought some Cytec Industries (CYT). I have loved the ZOLT carbon fiber story, but couldn't stand the lack of management performance and I am hoping that CYT will help me take advantage of a play on carbon fiber without all the excitement of ZOLT.CYT is a chemical company that also happens to be a world leader in producing carbon fiber. Where as ZOLT focuses on the industrial market for its carbon fiber sales, CYT focuses that portion of the business on aerospace and is a critical supplier for Boeing’s new 787.
Just two weeks ago, CYT announced that it was doubling its carbon fiber capacity at their North Carolina facility to support Boeing's 787 production. Cytec supplies the advanced composite materials used in carbon fiber to Boeing subcontractors, which indirectly makes the aircraft company one of its biggest customers. Aerospace makes up about 20% of Cytec revenue, and production of the Boeing 787 will help grow its top line in the next year by as much as 10%.
They reported blow-out numbers last night for Q3. Even though they cited the potential for slowness in Q4 and the increased costs for oil methanol and propylene and other raw materials, they have also been able to increase their pricing. They confirmed guidance towards the upper end of the yearly range and received an upgrade on today. I believe that blow-out numbers often come in groups and know that the Boeing 787 story is just beginning, so I am buying now.
This is not a rocket stock. It is a slow mover with some predictability. It is primarily a chemicals company with a successful carbon fiber market segment. I only plan to invest and own the stock because the options are thinly traded and I only nibbled today (on a day in which it was up big in a down tape), expecting the possibility that the price may come in further.
Cytec is a specialty chemicals and materials company that markets its products to the following markets: aerospace, adhesives, automotive and industrial coatings, chemical intermediates, inks, mining and plastics. They have four operating divisions: 1) Performance Chemicals; 2) Surface Specialties; 3) Engineered Materials and Building Block Chemicals; and 4) Performance Chemicals and Surface Specialties.
Performance Chemicals includes products such as mining chemicals, phosphines, polymer additives, specialty additives, specialty urethanes, and adhesives. This segment represents $865 million of the company’s $3.33 billion in revenue in 2006. This revenue is approximately flat year-over-year from 2005 and not an exciting part of the business. Earnings from operations for this segment were approximately 8%, up from 7% the previous year
Surface Specialties includes products such as Radcure resins, powder coating resins, and liquid coating resins. This segment represents $1.53billion of the company’s $3.33 billion in revenue in 2006, up 18% in revenue from the previous year. Earnings from operations for this segment were approximately 6%, up from 2% the previous year and I expect this segment to continue to improve results during 2008.
Engineered Materials is the rock star of the company. This division primarily manufactures and sells aerospace materials that are used mainly in commercial and military aviation, satellite and launch vehicles, aircraft brakes and certain high-performance applications such as Formula 1 racing cars and high-performance sports cars. They manufacture and sell advanced structural film adhesives and advanced composite materials to these markets and are dependent to a large degree on commercial and military aircraft build-rates. Advanced composites are exceptionally strong and lightweight materials manufactured by impregnating fabrics and tapes made from high performance fibers (such as carbon fiber) with epoxy, bismaleimide, phenolic, polyimide and other resins formulated or purchased by the company.
They are huge supplier of aerospace carbon fiber and are important suppliers for the F-35 Joint Strike Fighter, the F/A-22 and F/A-18 combat aircraft and the C-17 transport aircraft in addition to the 787 mentioned above. They manufacture and sell various high-performance grades of both polyacrylonitrile ("PAN") type and pitch type carbon fibers. Approximately 65% of their carbon fiber production is utilized internally (which represents 30% of their demand for carbon fiber) with the balance being sold to third parties.
They recently completed a project increasing their production of PAN carbon fiber by approximately 33%. They have announced their intention to build a new carbon fiber line. This project, if approved, is forecasted to cost approximately $150.0 million, take approximately three years to complete and increase their capacity of PAN carbon fiber by 100%. This segment represents $602 million of the company’s $3.33 billion in revenue in 2006, up 10% in revenue year-over-year. Earnings from operations for this segment were approximately 18%, down from 19% the previous year. This decrease in earnings was primarily due to lower production rates in one of their carbon fiber plants due to trial runs of new product and costs to startup a carbon fiber manufacturing line that was previously idled.
Building Block Chemicals produces product lines that includes acrylonitrile, hydrocyanic acid (a co-product of acrylonitrile), sulfuric acid and melamine which is produced both for use internally within their other segments and for merchant sale. This segment represents $339 million of the company’s $3.33 billion in revenue in 2006, up 16% year-over year in terms of revenue. Earnings from operations for this segment were approximately 5%, up from 2% the previous year.
They have huge cash flow which will allow them to take advantage of the boom in carbon fiber and the company pays a dividend each quarter (they pay about $0.10 per quarter). They have operations literally all over the world allowing them to take full advantage of the global economy. They are truly one of those multi-national companies that can take advantage of the falling dollar in that only 37% of their business is sold to North America.
They forecasted diluted earnings per share in the range of $3.60-$3.80 for 2007 and are on track to make $3.85 EPS (diluted) from my preliminary calculations after blowing out Q3 numbers on Friday. Their Gross Margin for 2006 was approximately 20% and increasing (the chemical segments dilute the GM achieved by the Engineered Materials group). They have been restructuring for the past couple of years, shedding low margin operations, shuttering money losing factories and redesigning others.
This is the fundamentals behind the company and is a more cyclical play than the technology basket I currently own, but I think that it plays on the global growth story and the company is well positioned to be a positive contributor to my portfolio.
I will take about their technicals in a later post.
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