Inside Wall Street: An Industrial Powerhouse Few Investors Know About

Gene Marcial's Inside Wall Street: Globe Specialty Metals
Gene Marcial's Inside Wall Street: Globe Specialty Metals

Ever heard of Globe Specialty Metals (GSM)? If not, you've got company. It surely isn't a household name, and investors hardly know it. But curiously enough, the products it makes end up mostly in every household.

Global Specialty Metals is one of the world's largest and lowest-cost producers of silicone metal and silicone alloys. Chemical companies are major users of its silicone metal and alloys, which they use in foods and shampoo, for example.

In spite of Globe's near anonymity, its stock has been on a roll, nearly doubling from a 52-week low of $6.81 on July 30, 2009, to $11 on Apr. 8. "The stock's climb is well deserved because of Globe's attractive growth prospects," says Lewis Rabinowitz, president of hedge fund R. Lewis Securities, which has accumulated shares. Because of growing demand for Globe's products, he says, most of the company's 2010 output has already been sold out. "We consider Globe a solid play in the industrial sector," says Rabinowitz.

"We expect demand for silicone metal to increase in the coming years, driven by growth in the chemical, aluminum and solar markets," says Ian Corydon, analyst at investment firm B. Riley & Co., who rates the stock a buy. He believes that despite the speedy ascent, the stock still has the potential of advancing to more than $18 a share in 12 months.

A Sheltered Market

The silicone metal market is characterized by extraordinarily high barriers to entry, says Corydon. A silicone metal plant "has not been constructed in the Western world in the last 25 years," he notes. The constrained supply -- partly because of heavy antidumping duties on silicone metal from China and Russia -- combined with increasing demand are bound to push up prices in the coming years, says Corydon.

Other big users of Globe's products are the automotive, food-beverage and solar industries, which are expected to help boost sales of silicone metal as the economy continues to recover, says Globe Chairman Alan Kestenbaum.

Auto makers use silicone metal in pistons, aluminum wheels and castings. The industry' big push to lighten the weight of cars means more aluminum will be used to replace steel, notes Kestenbaum. In foods and beverages, the use of aluminum cans creates a big part of the demand for silicone metal, which is a basic ingredient in making aluminum products. And in the solar industry, metallurgical-grade silicon, which is what Globe makes, is used in producing polysilicon for solar cells.

Globe might be the only metals company in the world today, says Kestenbaum, that's operating at 100% capacity. The majority of Globe's facilities, he notes, are located in the U.S.

Starting to Pay Attention

Analyst Michael F. Gambardella of JP Morgan (it has done banking for Globe) says the company's "low-cost profile positions it extremely well" to benefit from an environment of rising spot prices and improving end-market demand, which bodes well for profits. Gambardella figures Globe will earn 42 cents a share in fiscal 2010 ending June 30, on revenues of $469 million, leaping to 77 cents in fiscal 2011 on sales of $639 million.

The recovering automobile industry and rising general industrial end markets should boost Globe's stock over the near term. But for the long term, increasing demand from the solar market is likely to fuel the stock. Analyst Yvonne M. Varano of investment firm Jefferies, who raised her price target for Globe from $10 a share in September 2009 to $15 on Apr. 1, 2010, sees a "tight supply situation" coming because of crimped capacity, with no new plants planned for silicone metal in the West. She rates the stock a buy, and notes that it should react favorably to the overall economic recovery.

Indeed, with the economy on the mend, manufacturing and industrial companies are coming back into the limelight. And Wall Street is starting to pay attention, if gradually. So, Globe should fit the bill for investors looking for little-known but large industrials with prospects of gaining hugely from the global upturn.