Battery Materials Competition And Cost Pressures Will Limit Long-Term Earnings Potential

Catalysts

About Cabot

Cabot Corporation produces specialty chemicals and materials including reinforcement materials, performance chemicals and battery materials that serve a range of industrial and energy storage applications.

What are the underlying business or industry changes driving this perspective?

• The rapid build-out of global battery capacity and data center related battery energy storage systems is heavily concentrated in China and other highly competitive regions, which could pressure pricing for Cabot's conductive additives and reduce future revenue growth and EBITDA contribution from Battery Materials.
• Efforts to support gigafactory development in Western markets depend on customers prioritizing local supply and long-term contracts. If competitors replicate Cabot's material offerings or customers diversify suppliers more aggressively, Cabot's expected customer share gains could be smaller and limit future earnings expansion.
• Capacity rationalization actions that remove 120,000 metric tons of reinforcing carbons and target annual run rate savings of about US$22 million by mid calendar 2027 could also constrain flexibility if demand recovers or trade flows shift. This may cap volume growth and limit improvement in segment EBIT and net margins.
• Rising energy and transportation costs and potential further volatility in oil linked feedstocks, even with pass-through mechanisms and recent price increases of up to 20% in Specialty Carbons and Specialty Compounds, could outpace Cabot's ability to reprice contracts and weigh on segment gross profit per ton and overall net margins.
• Ongoing competitive intensity in Asia in Reinforcement Materials combined with customer agreement terms for calendar 2026 that already reduced gross profit per ton may signal structurally tougher market conditions. This can restrict future pricing power and hold back growth in revenue, EBIT and earnings per share.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on Cabot compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Cabot's revenue will grow by 2.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 5.1% today to 22.5% in 3 years time.
• The bearish analysts expect earnings to reach $884.2 million (and earnings per share of $17.31) by about August 2029, up from $187.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 5.2x on those 2029 earnings, down from 24.3x today. This future PE is lower than the current PE for the US Chemicals industry at 27.8x.
• The bearish analysts expect the number of shares outstanding to decline by 2.96% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.77%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Battery Materials is growing quickly, with 43% revenue growth year over year, trailing 12‑month EBITDA margins of about 24% and an expectation for about US$40 million of EBITDA in fiscal 2026. If this product line keeps scaling off the back of long term EV and battery energy storage demand, Cabot's revenue and earnings could be stronger than a bearish view assumes.
• Cabot highlights broad exposure to resilient end markets such as replacement tire demand and infrastructure. If these long term demand drivers remain steady through economic cycles, the Reinforcement Materials segment could sustain volumes and support EBIT and net margins more than a weak share price view implies.
• The company is running cost reduction and network optimization programs targeting US$30 million of savings in fiscal 2026 plus an expected US$22 million annual run rate benefit from capacity rationalization by mid calendar 2027. If these efforts are executed effectively, structural cost savings could support higher segment EBIT and overall net margins.
• Cabot maintains an investment grade balance sheet with about US$1.3b of liquidity, a net debt to EBITDA ratio of 1.5x and consistent cash generation. If this financial position allows ongoing investment in growth projects while still funding dividends and buybacks, long term earnings per share could be better supported than a bearish thesis allows.
• The company is closely tied into long term trends around data center build out, renewable power and grid scale storage through both Battery Materials and broader Performance Chemicals. If customer investment in these areas continues, Cabot's revenue mix could tilt further toward higher margin products and lift group EBIT and net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Cabot is $78.0, which represents up to two standard deviations below the consensus price target of $91.33. This valuation is based on what can be assumed as the expectations of Cabot's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $100.0, and the most bearish reporting a price target of just $78.0.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $3.9 billion, earnings will come to $884.2 million, and it would be trading on a PE ratio of 5.2x, assuming you use a discount rate of 7.8%.
• Given the current share price of $87.88, the analyst price target of $78.0 is 12.7% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.