Whenever assessing a stock's long-term growth potential,
investors also need to focus on the hurdles the company must
overcome before growth can take off. If you're talking about a
major technological or regulatory change, for example, then an
ample amount of ground work needs to be laid before the stars
For environmental services company
Calgon Carbon (NYSE:
, that groundwork has been laid for the past four years, and the
company should soon reap the benefits. Meanwhile, shareholders have
yet to benefit. The stock has traded a few dollars north or south
of $15 during the last four years, though a move up into the
mid-$20s appears increasingly plausible.
Meanwhile, downside appears quite limited -- just my kind of stock.
That's why I'm adding this company to my
$100,000 Real-Money Portfolio
Air and water
As its name implies, Calgon Carbon produces carbon in various forms
to either scrub power-plants of key airborne pollutants or
disinfect both drinking water and waste water. Across the map,
countries have been seeking to clean up their act, which has fueled
decent, though unspectacular, growth for this company.
Growth in each of the company's two main segments has actually been
a bit more erratic than that trajectory implies. Demand for air
scrubbing carbon spiked nicely higher as power plants were
retrofitted to cut emissions of mercury, sulfur dioxide and other
airborne pollutants. But the company's UV-based water filtration
systems have seen relatively flat demand as municipal budgets were
slashed during the recent economic slowdown.
These divisions carry disparateprofit margins, which helps explain
why Calgon Carbon's
growth has been more subdued in the past two years.
Yet both of these segments stand to benefit from looming regulatory
changes that were announced in December 2011. The most important
move: The Environmental Protection Agency (EPA) announced on Dec.
21 that it will implement the Mercury and Air Toxic Standards Act
(also known as the Maximum Achievable Control Technology Act, or
This could impact up to half of our nation's 1,300 coal-fired power
units. (One power station can have several units.) The act gives
utilities up to four years to comply, though incentives are in
place to act much sooner. Calgon Carbon's powdered activated carbon
) should see steadily rising demand late this year and into 2013
The company also stands to benefit from an EPA decision to require
all ships that navigate U.S. waters to implement water ballast
treatment systems . This comes after the devastation of sensitive
ecosystems in the Great Lakes and elsewhere from Zebra Mussels and
other organisms that are inadvertently picked up in other parts of
The decision is now open for public hearing and is expected to be
finalized before the end of 2012. Calgon Carbon's decision to buy
water ballast treatment firm Hyde Marine in early 2010 now looks
quite savvy. Calgon Carbon's ultra-violet water purification
technology , coupled with Hyde Marine's systems engineering
provides the company with arguably the most robust technology
platform in the industry. Investors are watching the decision
process by major countries as they seek to mirror the U.S.' ballast
water initiatives. For example, Russia is contemplating a similar
move, and may award the entire fleet upgrade process to just one
vendor. Such a move would be a game-changer for Calgon Carbon.
Good now, better later
None of these developments is likely to impact Calgon Carbon
imminently. Indeed, the company is likely to see sales rise in just
the high single-digit range in the first and second quarters of
2012, compared with a year earlier. And right now, analysts are
only modeling for roughly 10% sales growth in 2012 and 2013,
awaiting a better sense of timing as to when these regulatory moves
will boost sales. To make a rough guess, look for sales growth
rates to build slowly with each passing quarter, exiting 2013 at a
more brisk pace. It's the anticipation of such an upward trajectory
that should enable this stock to start rising in advance.
By that logic, Calgon Carbon'searnings power should exceed $1 a
share by the end of 2013 on an annualized basis (i.e.EPS will
likely move above $0.25 a quarter by then). Though few are talking
about it now, this company is capable of earning close to $1.50 a
share by 2014 or 2015. If that comes to pass, thenshares will
likely be rewarded with a forward multiple of 20 times
, which is why I think this stock, which currently trades at $15,
could move toward $30 ($1.50 * 20 = $30) within 12-18 months.
The Downside Protection -->
There is a high degree of recurring revenue in thisbusiness model ,
because carbon filters wear out and fully-engineered systems need
to be replaced. It's notable that this company has seen sales
decline only once since 2003 (when they fell 2% in 2005). This
explains why the stock has mostly remained above $12 during the
past four years, even with the occasional quarterly miss. That
appears to reflect the potential downside for this stock.
Upside Triggers -->
The timing of the revenue surge is a bit unclear. It may not take
place for a year or more. Yet it's the anticipation of an upward
trajectory that will boost
. And this is whereWall Street comes in. Most analysts have yet to
fully digest the changing regulatory environment that should boost
this stock. As analysts warm up to the company's opportunities,
target prices should steadily rise.
Action to Take -->
I will buy 400 shares (or roughly $6,000 worth) of Calgon
Carbon two trading days after you read this
. I suggest investors put in astop-loss order at $13, in the event
that amarket rout sucks this stock down with the pack. Shares can
be bought under $18, though that is a fluid target and could rise
as theturnaround takes shape.
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-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.