The "Wonder" of Carbon

07/22/2005 12:00 am EST

Focus:

Vivian Lewis

Editor and Publisher, Global Investing

Vivian Lewis will be appearing at the upcoming London Money Show. Here, she draws on the research of  Harry Geisel, retired US ambassador, and contributor to her Global Investing, for a look at a play on carbon fiber and its use in various emerging technologies.

"Carbon graphite electrodes are vital to making steel in electric arc furnaces, as well as in producing aluminum. The manufacturing processes in both cases are extremely complex and no new significant entrant has gone into the business since the 1940s. SGL Carbon (SGG NYSE), a German company which trades in the US as an ADR, is one of the companies that dominates this industry. SGL Carbon has lost money every year since 2000, but we suggest buying the stock for a likely turnaround. Its continuing operations already moved slightly into profit in 2004. The venerable M.M. Warburg, which was established in 1798, currently has a 'buy' on SGL, believing that restructuring and related costs are essentially complete. Two price increases have already been imposed this year. SGL Carbon is well into its turnaround.

"The firm's other two businesses, Graphite Specialties and SGL Technologies, are freebie bets on future growth. Together, their sales account for a third of current revenues but they are barely profitable. Graphite Specialties custom-makes high value-added technical carbons for high tech applications (such as semi-conductors) and mechanical carbons used as seal rings, bearings, and pump components. But it is the newest business, SGL Technologies, which offers potential for long-term growth. It specializes in carbon fiber components for aircraft, carbon ceramic brake discs, and fuel cell components. SGG already has a joint venture with Audi to volume-produce brake discs. It develops and commercializes carbon-based products for Polymer-Electrolyte-Membrane Fuel Cells. Sooner or later, the world must develop fuel cells as a major source of energy and SGG is a proven play on them.

"Finally, there is an exciting carbon fiber technology whose future growth is all but certain. Carbon fiber for aircraft parts is hot. Stronger and lighter than aluminum, carbon fiber is a key component in the DOD’s 'stealth technology.' The big news is that Boeing announced its 787 'Dreamliner' will use carbon fiber components in both the fuselage and interior. For a sneak preview of carbon fiber’s capabilities, check out the nifty black $1,800 briefcase made by Zero Halliburton. A set of aluminum flatware was one of Napoleon’s most prized possessions. When a more economical aluminum manufacturing system arose, it became the 'wonder metal' of the 20th Century. The same scenario might follow for carbon fiber in the 21st Century. Perhaps undervalued SGL Carbon could become the 'wonder stock' in our portfolios."

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