I couldn’t resist pulling this one out of the bin in the basement — the teaser ad came across my screen several times this week, which probably means that the Oxford Club folks are mailing it pretty heavily again…. and the ad they’re sending out is pretty much exactly, as far as I’ve been able to tell, the same ad they were promoting very heavily in the Fall of 2012.
The numbers are the same, the general gist is the same… the signature on the “letter” is different, since this ad comes from Joel Bowman instead of David Fessler and yes, the company they’re teasing for its “graphene domination” is the same. So who is it?
Well, we’ll get into all the details below… I don’t want to spoil the suspense. But the company is sure in a different place than it was 30 months ago when we first saw it. Since the ad is the same, I’ve included our full teaser solution article below without any edits or updates, but I also did add some commentary at the end to give you a quick update on what’s happening with the company. Enjoy!
—what follows is from November 12, 2012—
We’ve had a short breather from the wave of graphene-themed teasers lately — so is the fact that we’ve had this breather the reason that the junior graphite stocks are mostly near their 52-week lows? Or has the teasing stopped because the stocks have fallen?
Which came first, the chicken or the egg? Which came first, the stock bubble or the hype-happy stock promoter? Tough call on that.
But the fact of the matter is, the graphite stocks were being ridiculously over-promised as immediate beneficiaries of the huge technological advances that graphene is probably going to bring to the world. So the fact that graphite prices right now are primarily driven by steelmaking and, for the highest purity stuff, by lithium ion batteries that depend on mass electric car adoption … well, that means our continuing economic weakness around the world has put a bit of a prick in what had arguably been a bubble in prices of high-purity graphite (there isn’t exactly a widely-quoted open market in flake graphite, but according to most of what I’ve read — there’s a sample here — prices were at historic highs for 2011 and reportedly started falling in the Spring this year, to stabilize in recent months and give hopes of more appreciation in 2013).
So some weakness in the graphite price, combined with a slowdown in touting and teasing and stock promotion, has kept the prices of most of the junior graphite explorers and developers fairly low — with some exceptions, like the Aussie Syrah Resource that we wrote briefly about here last month. And now a cheaper newsletter has come rolling in to talk up the graphene story … but with a different spiel.
The Oxford Club is touting not a junior graphite miner as their graphene play, but a graphite technology company. So perhaps it has more of a chance to have a direct or immediate impact from graphene advances? Well, let’s at least find out who it is, then you can apply your own prognostication to the situation.
Here’s a taste of the tease:
“How a Tiny Tech Company’s New ‘Graphene’ Discovery Will Revolutionzie All Smart Phones, Tablets, and Hi-Def TVs …
“And Why Early Shareholders Could See Explosive Gains As It Seizes Control of These $357 Billion Markets ….
“A tiny company ha secured patents on a remarkable new scientific breakthrough …
“It’s called graphene.
“And this newly developed substance could render all computers, smart phones, tablets and hi-def TVs instantly obsolete.
“In the coming months, every person in America is going to want the brand new versions of these products. And one company holds the key.”
OK, so it’s not a crazy little junior miner they’re pitching — but that doesn’t mean they’re not going over the top a bit. Graphene isn’t going to be in your brand-new cell phone “in the coming months” … not unless by “coming months” you’re referring to some fairly large number, like, say, 40 months from now. I just made that number up, by the way, but it’s going to be a while.
In case that doesn’t get you excited enough, here’s a bit more:
“As soon as news of this life-changing new material hits the markets, we estimate this company’s shares could soar by 2,388%, as you’ll see. That’s enough to turn a grubstake of $900 into over $20,000.
“And why not? It’s perfecting a substance unlike anything the world has ever seen….
“This breakthrough could lead to mobile phones that roll up and can be stored behind your ear… smart tablets and hi-def TVs as thin as paper… super-efficient computers, solar panels and batteries… and cars and airplanes a fraction of their current weight.
“And then there are the mind-boggling medical and military applications, such as tougher-than-steel artificial limbs and ‘invisible man’ camouflage.”
So all of that is true, to some extent — graphene (which is just a sheet of carbon the thickness of a single atom, a nanomaterial) is a wonder material — conductive, light, strong, etc. … the Oxford Club folks aren’t wrong in calling it a “rock star” substance. But as to whether one company is going to have a chokehold? Well, color me skeptical … here’s some more of the pitch as we start to get clues about the specific stock they’re teasing:
“… who’s got a chokehold on the patents that could completely revolutionize these $357-billion markets?
“One little-known American company with a modest $1.3-billion market cap.
“And as this breakthrough transforms hundreds of industries over the next decade, this company with all the patents is likely to become very rich.”
Now, graphene is certainly on the minds of all the big electronics and high-tech materials companies (among others), from Intel to Samsung to, well, probably any big names you can come up with … but it’s also still largely academic research in the lab that’s the focus, and a great many of the patents are held by academic institutions and their researchers. So I don’t know how close we are to figuring out whose patents are going to end up being the most valuable ones, but just keep in mind that we’re still very early on in the process — the Nobel Prize for isolating graphene was granted in 2010 and the work for which they won the prize was conducted starting in 2004 (the substance was known but not well understood or isolated before then), so people are experimenting and designing cool stuff from graphene already, but there doesn’t seem to even be a consensus yet on what will be the most cost-effective method for mass production of graphene sheets… let alone which patents will be the core property on which the graphene industry is built. So … a grain of salt on the patent front, but we’re moving on … you can see the full ad, with the blue-sky future, right here, but for now we’ll extract a few more clues about our secret company:
“many believe we stand on the precipice of ‘The Graphene Age.’…
“But most amazing is that one tiny company holds the most important patents for producing this material.
“Right now, Fortune 500 companies are lining up to get their hands on it….
“The advances in electronics and computer technology over the last 40 years have been breathtaking….
“But as engineers try to build even more amazing products using the wonders of miniaturization and nanotechnology, there’s one big problem:
“What to do with all the heat.
“Every year, the latest laptops, tablets, and smart phones are jammed with faster processors, more memory, and in less space.
“But as these components become smaller and more tightly packed, they generate a lot of heat….
“So they need a solution. And they need it right now.
“And that’s where the short-term payoff for our small Midwest company (and perhaps you, too) comes in.”
So that’s the pitch — and they include photos of the “before and after” heat signatures of laptops to show the impressive impact that this company’s heat dissipation systems has on the hot spots … here’s how the describe the heat bit:
“This one company has already successfully commercialized the world’s thinnest and most effective heat dissipating system.
“Electronics companies the world over are signing up to get this breakthrough in their new gadgets.
“Apple has begun using early versions in their iPhones and iPads.
“Samsung is using it in their new razor-thin laptops.
“And this company holds the exclusive patents on it.
“These ‘heat spreaders’ provide cooling and shielding in consumer electronic devices, they allow batteries to last for hours longer, they reduce the size and weight, and vastly increase the amount of memory a hand-held device can hold.”
That heat dissipation system is not a graphene product, to be clear, it’s a graphite product — graphite (not graphene) has been used for heat sinks for a while, what’s described and photographed in the ad is basically a half-millimeter thick layer of graphite inserted into a laptop to dissipate the heat from the hard drive, and it apparently works quite well. The pictures used are also pretty old, it looks like the paper they’re lifting images from was presented at a conference in 2005. You can see plenty of examples of other companies using graphite to dissipate heat in electronics, from Panasonic’s graphite-coated rubber in cars to the pyrolytic graphite heat spreaders from Minteq …
… but since we’re talking about one specific company and product being teased, and we know whose heat spreader presentation they lifted the info from, we can draw our little lines of logic and tell you that, yes, the stock the Oxford Club folks are teasing here is Graftech International (GTI).
And yes, don’t worry, it matches up on all the other clues too — Graftech’s graphite foil was reportedly used in at least past versions of the iphone for heat dissipation, and they do have a patent on their version of it. This is not, mind you, a patent on graphene — it’s a patented application of graphite.
Here’s a bit more from the ad, as we try to draw some lines for you:
“the future is very bright indeed for the kind of heat spreaders this company specializes in.
“Because graphene promises to make its products and solutions 10-fold more effective.
‘Graphene is a prime candidate for solving the heat dissipation problems currently limiting development of nanoelectronics,’ report University of Texas researchers in Science Magazine.
“The reports adds, ‘The devices will consume less energy, be cooler and more reliable, and operate faster than current-generation devices.'”
There’s a bit of a flaw in that logic — graphene chips are supposed to be far more efficient and not heat up so much, so why would new products using graphene instead of silicon require these graphite heat spreaders/heat sinks that Graftech makes?
Well, since it will be quite a while before the silicon era ends, I guess we can leave their logic to stand on its own while we wait and see what products evolve. Here’s a bit more of what the Oxford folks say about Graftech:
“Right now the company’s in the middle of a mammoth build-up in preparation for the huge demand coming in from companies all over the world.
“But why specifically are all these Fortune 500 companies turning to just this one?
“Because, as I’ll explain in a moment, it holds over 750 major patents in these crucial technologies. It is the gatekeeper.
“If major electronics producers want to keep going faster and smaller, they will need the help of this company.
“It has nearly doubled its staff of scientists as management continues seeking engineers “focusing on the development of novel graphene materials for a variety of applications.”
“It’s already locked down production agreements with the biggest electronics giants, including Apple, Samsung, and Sony.
“And company executives, meanwhile, see this as the perfect buying opportunity. They just finished a 10 million-share buyback – and then promptly doubled down on 10 million more.
“Institutional money is pouring in, as well.
“The Vanguard Group owns over 6 million shares. Janus Capital has 4 million. Wells Fargo bought up 3.3 million.
“In fact, institutions now own 96% of this company’s publicly traded shares.”
So yes, all of that confirms that it’s Graftech being teased — though the most outsize position in GTI shares is held by the Royce funds, just FYI, they control about 14% of the company. And the ad teases some of the other things this company is doing:
“Its thermal shield protected Curiosity from the intense heat and enabled it to land safely on Mars.
“Does technology get any more advanced than landing a spaceship on Mars?
“No heat shield, no rover. Yet as we know, Curiosity is performing flawlessly on the red planet.
“And for that, NASA can thank this company and its incredible technology.
“Looking ahead, it has some 20 new applications in its pipeline.
“For starters, it’s in the process of turning its heat-spreading materials into a key component for electric car battery packs.
“Swapping out old aluminum for this company’s advanced products makes it possible to build a battery with the same energy capacity – but at half the size and weight.
“Obviously, that’s huge when you’re talking electric cars.
“This company is also turning heads with its recent deal with Airbus SAS, the world’s largest commercial plane maker.
“Airbus plans to work with it to ‘develop nanotechnologies for carbon-fiber structure materials,’ say company executives.”
All true, though also to a large degree all R&D work that’s being done by other companies as well — Graftech is a strong advanced materials company that’s spending quite a bit of money on expanding the reach of graphite, but it’s also not the only company in the world researching new graphite composites and materials.
And what we don’t hear is that none of this is Graftech’s core business — their core business is declining this year and will, they expect, be weak next year as well.
What is it? Steel. Yes, you’ve probably noticed that even the world’s largest steelmaker, Arcelor Mittal, is struggling (their debt is ranked as “junk” right now) because of weakness in the steel industry and falling prices and volumes in many areas … and it’s those steelmakers that provide most of Graftech’s revenue.
So the story of Graftech is of a graphite company with a strong business providing electrodes and graphite raw materials to steelmakers, but which is putting a fair amount of investment into their much-faster-growing Engineering Solutions division that invents and produces high tech engineered graphite materials, like those heat spreaders.
In the last quarter, GTI came in at the top end of their expected range on earnings because they’re cutting costs and headcount in their core business, and cutting back on capital investment, but also because their Engineered Solutions division is growing revenue faster than expected … and because, as teased, they bought back 10 million shares or so.
Now, I’m not all that delighted with the share buyback if I’m a shareholder — because they borrowed the money to do the buyback, and the next year or so, they’ve made clear, is fairly uncertain in terms of their pricing (they just tried to raise prices with steelmakers for 2013, dont’ know how that will work yet) and in terms of the performance of the global economy. I’m all for buybacks from companies that are cash-rich and don’t have better investment strategies, but I don’t really want my companies borrowing to buy back shares unless the company is ridiculously undervalued.
So the question for you is: Is GTI ridiculously undervalued? Here’s Oxford’s blue-sky description of the potential:
“This company’s books are solid.
“There’s money in the bank and plenty of cash flow (over $60 million) to support current operations and future expansion.
“It does business in over 70 countries, with operations spanning four continents and at 19 strategically located manufacturing facilities.
“In 2011, sales hit a record high of $1.3 billion.
“Its P/E ratio of 8.5 falls among the lowest 25% of all companies in its sector. So there’s still plenty of time to get in.
“On top of that, gross profit margins have run north of 20% for the past five years… and surged to over 26% in the two most recent quarters.
“Yet as you’ve seen, the future looks even brighter for this company and its products.
“Considering its already dominant position in these technologies, let’s say it captures just 5% of the $357-billion annual flat-screen and phone markets as graphene moves to the forefront.
“Even with a conservative 20% profit margin, earnings on $17.85 billion would come in around $3.57 billion, or $26 a share. Apply its (again, conservative) P/E of 8.5, and that puts the price of this little $9 stock at more than $224 a share.
“And that’s on just 5%. Imagine if they captured 10% or more!
“Any way you cut it, as it starts rolling out more and more graphene products, you’re looking at a gain of more than 2,388%… enough to turn just $900 into over $21,000, or less than $10,000 into over $200,000.
“Early investors in its $9 shares could be in for the ride of a lifetime as graphene becomes essential for dozens of new, multi-billion-dollar markets.”
Qualcomm, by the way, had sales of just about $19 billion last year — just by way of comparison. So saying someone will somehow earn 5% of the smartphone market because of their particular brand of material and some anticipated future advancements in those materials is not a conservative estimate, it’s a massive win of a huge portion of a gigantic business. Not impossible, but it’s not going to happen easily.
If we look at their financials with a broad brush, analysts expect them to earn about 96 cents next year, which would indicate a resumption of at least mild growth after this year’s expected decline, and they think the company will continue to grow at about 10% a year over the next five years. That gives them a price/earnings/growth (PEG) ratio of just over 1, and they also trade at about 1X sales and 1X book value, so it all shakes up as “perfectly reasonable” — not super cheap, not super expensive, and a company whose core business is very cyclical. If the Oxford Club folks are right, it would obviously turn out to be a bargain, and they have been compounding growth in their engineered solutions division at about 20% a year, they say, which is good … but the steel business is still the source of the lion’s share of their revenue, so you have to guess at how the steel business will do for a few years, how Graftech’s engineered solutions will grow over that time, and whether the higher-margin advanced stuff can make up for any decline in the lower-margin but higher-volume steel business.
And if you figure that out, by all means, let us know. I’d definitely be more comfortable with Graftech as a play on increased graphite demand by industry than I would be with the more speculative junior miners at this point, but that doesn’t mean GTI is guaranteed to turn your $900 into $20,000 or otherwise make you rich. Got an opinion on this one? Please share it with a comment below.
—and now back to 2015—
Well, analysts were really, really wrong — earnings per share did decline in 2011 and 2012, despite some buybacks, but the analysts’ optimism about 2013 and 2014 were far off the mark and the company lost money both of those years. Graftech is now engaged in what can only really be termed a rescue/turnaround fight — they replaced the CEO in January 2014 as perhaps the first salvo in this fight, but large investors (led by boardmember Nathan Milikowsky, whose family owns a substantial chunk of GTI and is also a creditor of the company) are agitating for a complete replacement of the Board of Directors (that group already has several seats on the board, including CNBC celebrity and hedge fund manager Karen Finerman). The press release from that group, calling themselves “Save Graftech,” is here, the response from the company is here. I don’t think an annual meeting has been scheduled yet, there doesn’t seem to have been any movement since this first salvo in late January of this year.
The stock has, as you might expect, declined substantially over the last several years because earnings have fallen, and because there’s almost no optimism anywhere in the steel industry, from whence most of their revenues flow. Graphene was always a “future” investment for Graftech, and it remains so, though they have continued to pour a lot of investment into advanced materials — much of that capital investment, it appears, has had to be written off. I don’t know why, but it could simply be because of the slow pace of actual commercial adoption of many of these new materials.
This is still a small company, they are very levered and are now getting “rescue” financing — more debt that they got on surprisingly decent terms that will be enough to repay their notes due to Milikowsky in November, and also a large preferred equity investment from Brookfield Asset Management that will come with 7% yields and a conversion rate that will have Brookfield owning 20% of the company if the stock spends much time above $5. That’s not quite as onerous a deal as Warren Buffett squeezed out of General Electric and Goldman Sachs during the height of the financial crisis, but it’s pretty close — healthy companies don’t have to give up that much to raise operating capital… but it’s a reflection of how poorly investors view GTI right now that the financing from Brookfield helped the stock leap by about 20% over the last week or so.
I don’t know whether or not Graftech’s turnaround will succeed — they have done some hard things, at least, including writing off about $200 million last year, largely on those advanced materials investments (that’s why the loss was so bad in 2014, though they would have lost money on an operating basis as well), but I don’t have any insight into whether their advanced materials business has any growth potential right now, or whether the market is likely to recover for their graphite anodes that they sell into the steel business (and which have represented the lion’s share of their revenue for many years)… their current projections for this year will let them come close to breaking even, probably, with positive EBITDA and operating cash flow that are probably enough to cover their financing costs, but I don’t know whether to trust their forecasts — and I certainly wouldn’t call them a green light to spur optimism about the turnaround accelerating (though of course, once everyone agrees that the turnaround is working, if that does happen, the stock will start to reflect that optimism).
So no great strong opinion from me on this one, but plenty for you to chew on if you’re still interested in what was a very, very heavily hyped Graphene story at least through 2013… but I thought I should at least push this info out into the ether for you again since it seems like the ad is again circulating — and yes, the ad still uses those 2012 numbers that we first wrote about and that are included above. I’ve also included all the original comments on this article below so you can see some of that past discussion, but please feel free to add on some current thoughts if you have any.