How the Steel Was Tempered – GrafTech (EAF)

A company shouldn’t get addicted to being shiny, because shiny doesn’t last.

Jeff Bezos

First thing first, never rely CapIQ on any calculation. I was on an onerous journey of finding out a good LBO candidate for a case competition. And GrafTech popped up as a low P/E company on finviz. The next step for a lazy person like me is to glance over the financials on Capital IQ.

It goes without saying that cash is king in the investing world. So, I habitually found my way to the section that shows cash flows:

You may find this under the “Cash Flow” tab, if you have a CapIQ, that is. The time period goes from 2014 to 2018, and the column on the right is the LTM financials ending Sep. 30, 2019.

Despite some hiccups, the FCFs look decent to me — at least they are all positive. However, in a more conventional way, if we just eyeball the cash flow statement, we can get a sense of the company’s FCF in a not-so-misleading way by simply subtract CapEx from the Operating Cash Fl0w:

Clearly, the company has yielded little to even negative FCF in some time period. And volatility of the cash flow growth rate makes the company unattractive to a PE investor wannabe. Had I not been so lazy, I would have not spent time reading about the business.

Company Overview

The company has been doing carbon related business since 1870s. Currently, GrafTech is a pure play manufacturer of graphite electrode, an un-substitutable input for Electric Arc Furnace (EAF) steelmaking. The company is the only vertically-integrated graphite electrode manufacturer in America, owning the second-largest petroleum needle coke producer in the world. Petroleum needle cokes are raw materials for graphite electrodes.

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