Global tire pick-up tipped to lift Cabot shares

ERJ staff report (PR)

Investment and finance company KeyBanc Capital Markets Inc. has given a positive assessment of Cabot Corp.’s business prospects, due largely to improving demand for the company’s carbon black reinforcement materials from an increasingly upbeat global tire sector.

Along with improved demand, Cabot’s recent acquisition of NHUMO in Mexico and ramp-up of additional capacity in China should add to the potential upside in operating earnings, KeyBanc stated in an 19 May update on the company.

KeyBanc expects “mid single-digit” volume growth for Cabot’s reinforcement materials business – 56 percent of total sales - in FY14, and global tire volumes to stay in an “upward trajectory” to the year-end at least.

Around 70 percent of sales in the carbon black segment relate to global tire manufacturing - about 40-45 percent of which is related to passenger tires, 35 percent truck/bus tires and 20-25 percent other tires. Industrial rubber products account for the remaining 30 percent.

Geographically, demand is rising in Europe and North America with growth in automotive production levels and a pickup in the replacement tire market. Elsewhere, KeyBanc described demand in China as “solid” with strong growth in automotive production and tire exports, but noted softness in some South American markets, particularly in Argentina, Brazil and Venezuela,.

Some of CBT’s largest customers reported volume growth in the first three months of 2014 and have posted positive expectations for the full-year. Volume-growth expectations for 2014, for instance, range from around 3 percent at Michelin and Goodyear, up to above 5 percent at Pirelli.

Compared to recent years, KeyBanc said rising volumes should soon help Cabot negotiate better prices for its carbon black products, particularly as utilisation rates improve both at the company and across the industry as a whole.

“CBT stock still trades at valuations below its specialty chemical/material peers, in our view. We feel that current valuation still offers a buying opportunity given the strong earnings growth potential and cash generation,” KeyBanc concluded.