GrafTech International Ltd. (NYSE:GTI)

goodalexander (< 20) Submitted: 7/20/2009 6:59:08 PM : Start Price: $12.24 GTI Score: -51.43

You should take a long position on Graftech to benefit from the market’s shortsighted view of steel manufacturing, industrialization, and a misunderstanding of Graftech’s potential contribution to alternative energy production.

Graftech will meet the needs of world industrialization: Due to higher marginal utility of capital and population growth patterns, emerging markets will industrialize in the mid-to long run. Industrialization requires steel. Steel production takes place in Electric Arc Furnaces (EAFs) that must continually use great amounts of graphite electrodes to regulate heat and electric flow. These electrodes deplete and must be replaced. Graphtech has an 80 country-wide electrode distribution network, the expertise, and the productive capacity to dominate in growing markets. Using current spot prices for Graphite Electrodes combined with

Graftech’s annual manufacturing capacity of 220,000 metric tons, Graftech could feasibly double its 2008 revenue with no capacity constraints that would lower its 27% operating margins.

Graftech has internationally diversified revenue streams: Graftech does not get more than 10% of its operating revenue from any one country. It has 20% of the total world market share, and established distribution networks and intellectual property that prohibit competition. The company has little credit exposure, and its diverse revenue streams shield it from exchange and interest rate risk.

Graphtech will dominate multiple worst case scenarios: Trading at $12.22, down over $15 from its 52 week peak of $27.21 a share, Graftech is priced assuming that it will not capture new markets, and that durable demand will be permanently impaired. The belief that steel production will remain stagnant is extremely short-sighted because delayed capital overhauls and industrialization together must eventually cause steel production to surge above previous 8% annual growth levels. Graftech’s international presence will allow it to supply the steel producers that profit from the inevitable industrial overhaul. Additionally,
Graftech’s polysilicon production, ingot processing, and high temperature processing knowledge provide necessary heat control for both solar and nuclear technology.

Graftech’s financial, strategic, and operational positioning minimizes its risk while exposing it to huge upside potential.