Basic Materials | United States
WSD Target Price
Annualized Return Since Publication
Target Equity Value (Δ)
Source: Bloomberg end of day market data; not adjusted for dividends (December 26, 2018).
Returns assume a short investment position on the date that WSD Capital Management published its thesis, and an exit on the date that the WSD Target Price is realized.
Returns do not reflect any taxes, fees or dividend and interest expenses related to short sales.
The returns are hypothetical and do not reflect the actual results of WSD Capital Management’s investment activities, nor is it necessarily indicative of future results of WSD Capital Management’s investment activities.
Cabot Corporation (“Cabot”) is a global specialty chemicals and performance materials company. The company is a leading provider of rubber and specialty carbons, activated carbon, inkjet colorants, cesium formate drilling fluids, fumed silica, and aerogel.
WSD Capital Management announced its short position in Cabot on September 1, 2017. Cabot’s primary business segments by revenue are: Reinforcement Materials, Performance Chemicals, and Purification Solutions. Given our negative long-term crude oil outlook, we foresee headwinds within Cabot’s joint venture in Venezuela and its Specialty Fluids business segment, which is influenced by the number of end-users and drilling projects as well as the size, type and duration of the respective drilling jobs.
Within the company’s Purification Solutions segment, demand is primarily dependent on growth in activated carbon based solutions for water, gas and air, pharmaceuticals, food and beverages, catalysts and other chemical applications. The mercury removal related portion of the business, which is largely dependent on the amount of coal-based power generation used in the U.S. and the continued regulation of those utilities under the Mercury and Air Toxics Standards (“MATS”), seems susceptible to challenges due to the E.P.A.’s decision to aggressively roll back federal pollution regulation. Moreover, advancements in renewable energy and the shift to electric cars marks coal-based power generation and the activated carbon products used in catalyst production as sunset industries.
In the Performance Chemicals segment, we foresee challenges that will be similar in scope to those that shaped fiscal 2016 results due to a less favorable price and product mix, which was mainly driven by price adjustments to customers for decreases in raw material costs. Moreover, any potential deceleration in the automotive industry, construction and infrastructure projects is expected to prompt a re-rating of the segment demand outlook.
The Reinforcement Materials segment volume is highly correlated to the number of vehicle miles driven globally; the number of automotive builds and replacement tires produced. Our outlook for Reinforcement Materials is mixed. While the long-term fundamentals for tire growth in North America remains solid, demand outlook remains soft due to high levels of truck tire inventories in the supply chain. The South American market continues to be weak and it remains to be seen whether signs of recovery are lasting.
We exited our short position in Cabot after the company’s common stock realized its target price in December 2018.