Barbie dolls and a micro-cap Graphite Opportunity
Welcome to the Sustainable Money Mail! It’s been a bad quarter for big tech, and all eyes are turned towards earnings reports, but we think there’s value to be found amongst mid- and small-cap ESG companies. From steel laminations to barbie dolls, here are three investment opportunities we’ve found this week.
International Graphite
International Graphite Ltd (ASX: IG6) is a micro-cap vertically integrated graphite extraction company based in Australia. This week, it’s found “exceptionally high grade” graphite at its new infill drilling project in Springdale. Graphite is needed in electric vehicle batteries, and International Graphite will be looking to ride this growing market to become a major player in the industry.
International Graphite’s oversubscribed IPO in April raised A$ 10 million. Shares currently trade at 34 cents, giving IG6 a market cap of A$ 29 million.
Thanks to three major advancements, they’re on track to become Western Australia’s first ‘fully-integrated mine-to market’ graphite producer.
Their pilot graphite developing plant received A$ 2 million backing from Western Australia’s Government’s Department of Jobs, Tourism, Science, and Innovation.
New high-grade graphite has been discovered at the existing Springdale drilling site.
The first sample products for high purity graphite and battery anode material (BAM) has been produced - this is the first step towards full-scale commercial production.
International Graphite is looking to develop 1,000 tonnes a year of commercial graphite. Graphite prices have been surging this year, with spot rising to over US$4,400 / tonne.
If this momentum continues, International Graphite has a real chance at becoming a major global supplier. The World Bank says graphite demand will increase by 500% between 2018 and 2050. The global graphite market is expected to reach US$21.6 billion by 2027. Electric vehicle uptake will drive >700% graphite demand growth by 2025.
Company Chairman Phil Hearse was confident in the continual growth of the market, explaining that “graphite is critical for global decarbonization.” International Graphite is ambitious to “establish a new sovereign supply for Australia and a new global source for international battery manufacturers.”
Risks
International Graphite is talking big at the moment, but it’s a young company with no real history of returns. Net income last year was a loss of A$790,000 - 65% more than the year before. Most of this is upfront investment on the new Springdale plant, which has yet to produce any commercial output.
The company has a current ratio of 10.19, meaning it’s pretty much clear of debt risk, and well positioned to keep operating in a rising rates environment. It’s trading a price/book of 3.1 - pretty expensive for a company with no track record, but still cheaper than its peers.
Our take
Investors are betting on the success if the Springdale project. If International Graphite can start delivering positive net income, it can establish itself as an major player in a rapidly growing industry, and definitely a stock to watch.
Worthington Industries
Worthington Industries (NYSE:WOR) is a global diversified metals manufacturer based in Ohio. Finding under-the-radar stocks with top ESG credentials is always a challenge, but we think WOR might be one of the best around.
Worthington (market cap $2.3 bn), specializes in steel processing, consumer and building products. The company’s main product is electrical steel laminations, which are used in EV charging stations, propane tanks and wind turbines. This means they directly help generate clean and renewable electricity, making them very well positioned in both the decarbonization and energy transition industry.
Additionally, they recently announced 2 “game-changing” developments.
SmartLid monitoring system: enables remote-tracking of heating-system tanks through advanced technology. This reduces emissions (helping us reach net-zero) and significantly cuts costs by eliminating the need for service engineers to check when tanks need to be filled individually.
Sustainable Energy Solutions: a new business focused on developing green hydrogen and natural gas fuel sources- markets expecting to reach US$89B and US$75B in the US alone.
Risks
Our biggest concern about the company is the low operating margin, which currently sits at 4.65%. It’s been growing steadily since 2020, but still sits below industry average levels of 6.65%.
Our take
Metals and Mining stocks are cyclical, so they’ve been having a rough 2022. However, bullish investors may want to take advantage of cheap prices to pick up a bargain, and Worthington seems to be a good choice. With a P/B ratio that’s lower than the industry average (1.52x vs 2.07x), the stock seems cheap and provides an attractive Risk/Reward opportunity.
Mattel
Mattel Inc (NASDAQ: MAT) is a children’s entertainment company that designs and produces toys, gaming and lifestyle products. Last week, the company released 33 toys made using 99% recyclable materials, up from 4 toys in 2020. It even released a new Barbie doll made of recycled plastic trash collected in Mexico.
The company is committed to achieve a fully sustainable product line, including packaging, by the end of the decade, partly due to the parent-led push towards sustainable production.
Nearly 80% of parents now rate sustainability as important when buying toys for their children. “I think we might actually be at a tipping point,” said Pamela Gill-Alabaster, head of global sustainability at Mattel. “There’s a pull from consumers, and I think we’re going to see more of that.”
This genuine focus on ESG could give Mattel a unique brand-appeal advantage, adding to their already-strong brand loyalty that’s been achieved by tapping into niche consumer segments including collectors and enthusiasts.
Risks
Mattel released their earnings report on Tuesday, and it’s generally being taken as bad news. Shares were down over 5% on open, after the toymaker lowered its full year profit forecast, despite a prosperous second quarter in which they broke trends to leave forward guidance unchanged. Now, they see inflation weighing on holiday season sales.
Still, even with this shock, Mattel shares are only down 16% YTD against almost 20% for the S&P500. Segments of Mattel’s business can definitely hold up because of their strong brand loyalty, and at a 0.78 PEG ratio, the company is cheap against its long term earnings growth.
Moreover, compared to its competitors, Mattel has a higher concentration of customers outside the U.S, making it a good play on market growth in the developing world.
Our take
It’s bad news for investors pretty much across the board right now, but companies like Mattel are expert and finding a way through tough times. For long term investors, Mattel is one of the strongest brands you can buy at a discount during today’s bear market.