Battery And Data Center Demand Will Support A Steady Long Term Materials Story

Catalysts

About Cabot

Cabot develops and supplies specialty materials, including reinforcement materials and performance chemicals used across batteries, tires, data centers and infrastructure applications.

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

• Rapid build-out of battery energy storage systems for data centers and grid support is increasing demand for Cabot's conductive additives, formulations and blends, which can support revenue growth and EBITDA in the Battery Materials product line.
• Expansion of global gigafactory capacity in China, Europe and other Western regions is supporting Cabot's battery materials volumes and mix, which can influence segment revenue and EBITDA margins as capacity utilization improves.
• Growing use of advanced materials in EV batteries and energy storage, including fumed metal oxides for cathode and separator coatings and aerogel for thermal management, is broadening Cabot's wallet share per battery system, which can support higher average selling prices and gross margin per ton.
• Ongoing cost reduction and network optimization programs, including targeted capacity rationalizations and process technology deployment, are expected to lower Cabot's cost base, which can support operating margins, cash generation and discretionary free cash flow.
• Pricing structures with raw material pass-through in Reinforcement Materials and recent pricing actions of up to 20% in Specialty Carbons and Specialty Compounds are designed to offset higher input costs, which can help protect segment EBIT and overall net margins.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Cabot's revenue will grow by 3.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.9% today to 12.1% in 3 years time.
• Analysts expect earnings to reach $479.7 million (and earnings per share of $9.5) by about June 2029, up from $281.0 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 10.5x on those 2029 earnings, down from 15.2x today. This future PE is lower than the current PE for the US Chemicals industry at 26.6x.
• Analysts expect the number of shares outstanding to decline by 2.97% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.71%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Battery Materials is growing quickly, supported by 43% year over year revenue growth and trailing 12 month EBITDA margins of about 24%. If this high margin, higher growth part of Cabot continues to scale while the market prices the business on more of a specialty materials profile, the share price could trend higher instead of staying flat as earnings and cash flow expand.
• The broad exposure to long duration trends such as EV adoption, battery energy storage systems for data centers and grid support, and materials used across data center infrastructure creates multiple avenues for sustained demand. This could support higher revenue and earnings over time than implied by a flat share price view.
• Cost reduction and network optimization actions, including the targeted closure or partial closure of plants in Argentina and the Netherlands and programs targeting $30 million of savings in fiscal 2026 plus an additional $22 million annual run rate benefit by mid calendar 2027, may structurally lower the cost base and lift net margins and earnings. This could justify a higher valuation than a flat share price suggests.
• Contract structures with raw material pass through in Reinforcement Materials and pricing actions of up to 20% in parts of Performance Chemicals are designed to offset higher input costs. If these mechanisms continue to protect gross profit per ton and segment EBIT during periods of energy and feedstock volatility, the resilience of margins and cash generation could support a higher share price.
• A strong balance sheet with about $1.3b of liquidity, net debt to EBITDA of 1.5x, consistent discretionary free cash flow and ongoing dividends and share repurchases, including $73 million returned to shareholders in the latest quarter and a 5% dividend increase, gives Cabot capacity to keep reducing the share count and support earnings per share, which can be a positive driver for the stock over the long run.

Valuation

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

• The analysts have a consensus price target of $85.67 for Cabot based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $98.0, and the most bearish reporting a price target of just $70.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $4.0 billion, earnings will come to $479.7 million, and it would be trading on a PE ratio of 10.5x, assuming you use a discount rate of 7.7%.
• Given the current share price of $82.92, the analyst price target of $85.67 is 3.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.