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Alright, so I know it’s all so tiring to hear so many AI stock pitches these days (trust me, I am too). There’s genuinely alot of piece of shit not-so-great companies goaded as some key player in the value chain.
I do encourage exercising caution, alot of them if you look at the numbers, you realise that the “AI” component is only 10 or 20% of their profits, sometimes even less (as in… 0%, just a promise). This is unlikely to move the needle in any meaningful way any time soon, and alot of anticipation is priced in already.
So on the contrary, I am somewhat surprised how little attention this company has gotten in comparison and I compelled me to write about it. (Sorry, not sorry). The company is more than a 100 years old! Yet their applications are in a sweet spot, actually, and if this were an AI Data Center Bingo they would be a strong candidate (lol). They provide high-value-added products with applications in HBM, DRAM, CPU and GPU which drives 70%+ of profits. Besides that, they’re a really interesting diversified chemicals business and tend to be dominant in its niche.
The numbers back it up. Over the last 10 years they’ve been able to compound their earnings at close to a 20% CAGR! And I feel the best is yet to come but… the valuation does not seem to reflect the quality and opportunity. These aren’t commoditized products but rather high-performance materials that are hard to replicate. These are high margin opportunities and some of the key segments are north of 20% with opportunities to expand that.
What I also like and strongly prefer when looking at these is that it also has a defensive component that’s not dependent on such sector at all.
Namely, they also have non-AI related business units that are generating steady profits which, importantly, are recurring i.e. not cyclical in nature. Whilst this might ‘cap’ the upside to some extent, I like the idea that this provides a source of stability for the company. And will result in less earnings volatility (I just really don’t know which part of the cycle we’re in).
It trades at ~6x EV/EBITDA today or mid teens P/E on depressed earnings, representing a noticeable discount to key peers.
This might actually be my purest exposure to the whole “AI” thing but this is the type of idea I can get behind because it’s not just trading based on hopes and dreams but backed by fundamentals and a decent valuation.
I’m sure you have AI fatigue getting thrown names like this all day but my point is: sure, maybe they’ll benefit from GPU/CPU/Memory tailwinds but that aside I also just like this as a diversified chemicals business. And you know… I did spend some time looking at this/talking to the company, so I might as well share my findings to my beloved supporters!
Additionally, I also like the fact that they are increasingly becoming more shareholder-conscious, through improvements in IR but also actively returning capital through shareholders. They’ve done chunky buybacks in the past and share count has been decreasing over time. They’re also unwinding cross-shareholdings. So not only is this interesting as an “AI” name but you could argue it is also a ‘governance’ play. There’s still some room here currently ~35% of market cap is cash and marketable securities.
I do think it’s overlooked. I actually have quantifiable data to back it up. This is so underfollowed even by Japanese investors that there’s barely any chatter on the Yahoo Discussion boards. {Although annoyingly stock was up quite abit on Friday…}
So let me provide a quick breakdown of this business and why I thought it was interesting. I’ve taken a small position here but generally avoidant to go big because I don’t see a real catalyst at the moment. I’ll keep this note relatively short. (As usual, please beware my definition of Short is sometimes not that short).
Without further a do…
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