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Research from Water Tower Research

Water Tower Research is a leading equity research firm that provides research on micro, small and mid cap companies.

Water Tower Research was founded by Wall Street veterans after witnessing a fundamental shift in the investment research industry with the result being a declining knowledge base among investors, a lack of awareness and a shrinking pool of fundamental research being conducted on companies across the small-cap and micro-cap spectrum. The same issues are now increasingly occurring in the mid-cap space. This sea change within the investment community is impacting not only the companies themselves but also current shareholders and potential investors. With significantly less active sell-side sponsorship by Wall Street, a substantial information gap has developed between companies and various constituents in the financial community. The net result is fewer channels for insight and information to flow between companies and investors.

Equity Research Firm

Thematic (Sector/Industry)

WTR-CMI last week. The market recovered somewhat from several days of selling last week, with the S&amp;P 500 eking out a 0.8% gain. However, the broader Russell 2000 index declined 1.0%, and our WTR-CMI index of 30 chemicals and materials technology stocks fell 1.6%. While all the stocks in our index had fallen the week before last, six of them managed to deliver positive returns last week, with four even exceeding the returns of the S&amp;P 500.
Winners and losers. The gainers in the WTR-CMI last week were led by CMP (up 5.3%), ECVT (up 4.8%) and CVTA (up 4.4%). Winter storms and expected higher contract prices for specialty phosphate products may be driving positive investor sentiment at CMP, while&nbsp;speculation that ECVT may be exploring a sale&nbsp;could have been responsible for its stronger showing. The drags on the WTR-CMI’s performance last week were SXT, PLL and NGVT, each of which fell over 5%.
Post-spike, fertilizer prices may remain higher. Pressured by low-cost competition from China, the fertilizer industry was operating in a low-price environment as recently as last year. However, logistical disruptions, higher energy and chlorine costs and, most importantly, lower production in, and exports from, China had driven&nbsp;fertilizer prices&nbsp;up to near-2008 levels last year. While supply constraints and production-cost inflation may be passing phenomena, we see fertilizer prices remaining above 2020 levels going forward as Chinese production may remain below previous levels. This may be a positive for multinational fertilizer producers such as CF Industries (NYSE: CF), Mosaic (NYSE: MOS), and Bunge (NYSE: BG).
Organic produce growth continues. Despite the return of food service in 2021,&nbsp;organic produce sales&nbsp;and volume at retail outlets continued to deliver positive Y/Y growth throughout 2021, finishing the year up 5.5% in value, and up almost 2% in volume. Organic farming relies more on bio-ag products than conventional farming, and growth of the industry should be a meaningful catalyst for the growth of bio-based ag-chem products and their producers, including established players such as FMC and CTVA, as well as emerging ag-bio companies such as MBII.
WTR-CMI WEEKLY PERFORMANCE

Lithium and EV Ecosystem Developments
There were several announcements last week across the lithium/battery/EV ecosystem, highlighting the continuing growth and maturation of the industry as it looks to address both near-term issues of battery technology and production capacity, as well as longer-term concerns about charging infrastructure and post-life battery recycling. The deals, agreements, and partnerships span the breadth of the industry—from automotive manufacturers to battery producers to lithium sourcing.
Recycling key to the EV promise of environmental benefit. GM and LG Energy, through their battery production joint venture Ultium Cells, announced&nbsp;an agreement with Li-Cycle—a lithium battery recycling company—for the construction of an EV battery recycling plant adjacent to Ultium’s Ohio battery production plant. The facility is expected to be operational in 2023. Panasonic and Toyota also announced that they have started&nbsp;joint research with the University of Tokyo&nbsp;on battery resources and recycling, looking to optimize battery production technology, lower the cost of battery production, and ensure better recycling of battery waste and post-life batteries.
Looking for a better mousetrap. British battery cell manufacturer Britishvolt, looking to improve the heart of an EV—the battery—has signed a&nbsp;two-year contract&nbsp;with the UK Battery Industrialisation Centre (UKBIC) to further develop and manufacture the company’s high-nickel EV sample cells for mass production. Production is expected to start in late 2023. The development of solid-state lithium batteries is also getting a boost with&nbsp;Mercedes-Benz’s investment of nearly $100&nbsp;million in a South Korean solid-state battery cell manufacturer ProLogium. As part of this, the companies have agreed to jointly develop next-generation battery cells.
Chinese battery producer looks to expand. Construction of battery plants is accelerating worldwide to meet the expected demand, given the sharp rise in EV sales, and the phalanx of new EV models set to drive into the market from most auto manufacturers over the next 2-3 years. Chinese battery manufacturer&nbsp;China Lithium Battery Technology (CALB) has signed contracts&nbsp;with two cities in the southern Chinese province of Guangdong to build new production facilities. CALB’s goal is to produce 1,000 GWh worth of batteries a year by 2030 across its seven plants in China, as well as at additional facilities, including two newly announced locations and an expected location in Europe.
Plug-in ready. As EVs proliferate, charging anxiety (or worries about the availability of charging stations that are as convenient, or at least as common, as gas stations) will need to be addressed by building out charging infrastructure. To that end, a&nbsp;memorandum of understanding&nbsp;was signed between Advanced Battery Concepts (ABC) and GreenCore, under which ABC will supply its patented GreenSeal storage batteries to 10,000 solar EV charging plazas being installed by GreenCore EV Services across the US. While additional investments in charging infrastructure will need to be made to make EV charging points as ubiquitous as gasoline pump locations, agreements such as these suggest the industry is preparing for a post-ICE (internal combustion engine) transportation future. However, as&nbsp;this article points out, America still has several issues to address and a long way to go before consumer anxiety is fully addressed and EV convenience becomes on a par with ICE-vehicle owners’ expectations and experience.
Some like it not. Apart from supporting the growth of EVs, there is increasing focus on supplying lithium to battery plants being built around the world. While several spodumene and brine projects are being developed in the US, LATAM, and Australia, European countries and companies looking to domesticate their lithium supply—to at least some extent—are increasingly looking at geothermal wells as a source of lithium-rich brine. Most recently, Vulcan Energy Resources, an Australia-based junior lithium producer, has been granted a&nbsp;research permit in Italy. It concerns a 11.5-square-kilometre area in Cesano, near Rome, where brine samples were found in a geothermal well. However, as in the US, some member-countries of the European Union appear to have the ‘not in my backyard’ mindset when it comes to lithium mining and extraction projects. Specifically, Serbia, bending to the demands of environmentalists and locals,&nbsp;has denied permission&nbsp;for the British-Australian mining company Rio Tinto’s Jadar project. Rio Tinto wanted to build a lithium mine in Serbia as part of the project. We hope domestic players currently working to obstruct several lithium development projects in America are less successful in keeping the production of this key and strategic material out of the country.
Automotive &amp; Transportation
Second verse same as the first. Benefiting from easy comps in 1H21, the&nbsp;European commercial vehicle market&nbsp;posted a positive 9.6% Y/Y growth in 2021. However, December’s 8.4% drop in Y/Y registrations was the sixth month in a row of negative Y/Y comps, and with supply-chain issues and pandemic-related disruptions ongoing, 1H22 may see a continuation of this trend. The passenger vehicle industry, which faced similar supply disruptions and pandemic-related closures, was also buffeted by the shortage of semiconductors, which most have blamed for poor volume performance of the industry in 2021. Unfortunately, that situation is not about to change soon. A recent report by the&nbsp;US Commerce Department&nbsp;appears to echo this sentiment, and early reports appear to substantiate this concern. Thus, after a rebound in December, Chinese auto production is expected to decline again&nbsp;in January on a Y/Y basis&nbsp;due to China’s toughening measures to curb sporadic coronavirus outbreaks in several major cities. China is not an exception. As January ended and February got under way,&nbsp;Toyota announced&nbsp;it will suspend production of 19 lines at 11 plants in Japan, out of a total of 28 lines in 14 plants. for several days. That almost guarantees the company will miss its 9 million unit production target for F2021 (Mar-22). It is not clear if the pandemic/chips/logistics situation will improve significantly in 1H22, and with tough Y/Y comps, negative cadence of vehicle production may continue.
Light at the end of the chip tunnel?&nbsp;Bucking the generally pessimistic tone,&nbsp;Hyundai Motor offered a more hopeful outlook, expecting the semiconductor shortage afflicting the global auto industry to ease next quarter, and allow its sales to return to pre-pandemic levels in 2022. However, even the South Korean manufacturer acknowledges that the recovery will be driven by 2H22 Y/Y increases, and is counting on sales in the US, its biggest market, to grow 20% compared with 2021. For the hopes of auto manufacturers of an improved 2022 to come to fruition, semiconductor companies will need to significantly ramp up their automotive chips production. Intel’s recent announcement of a central Ohio-based fab construction is a welcome move in the context. Other semiconductor manufacturers are also scrambling to expand production capacity. To meet the growing demand,&nbsp;Germany-based Infineon plans to expand&nbsp;its production capacities, including investment in its €1.6 billion ($1.8 billion) semiconductor plant in Villach, Austria, which was inaugurated last year. Still, the company expects chip shortages to last until 2023, with summer 2022 already seeing some improvements. Similarly, French-Italian chipmaker&nbsp;STMicroelectronics plans to double its investments&nbsp;this year (up to $3.6 billion) include building the first production line of a new 300 mm wafer plant in Agrate, Italy. Again, given the timing of construction and ramp-up, these investments are aimed at meeting the expected demand by 2023 more than supplying the industry’s needs in 2022.
M&amp;A Update

LAC completed its previously announced&nbsp;acquisition of Millennial Lithium
FUL finalized its&nbsp;purchase of Apollo, the UK’s largest independent manufacturer of liquid adhesives, coatings, and primers for the roofing, industrial and construction markets.
Privately held American Colors Inc. of Sandusky, Ohio announced the acquisition of a color dispersions manufacturer, Colorificio Migliavacca of Bergamo, Italy.

Rating and Price Target Changes
ALB&nbsp;– RBC lowered its price target (PT) to $290 from $315 and reiterated its Outperform rating; HSBC upgraded the stock to Buy from Hold and raised PT to $280 from $250.
ASH&nbsp;– BMO lowered its PT to $120 from $133, reiterating its Outperform rating, while JP Morgan lowered its PT to $107 from $109 and maintained its Neutral recommendation. Wells Fargo downgraded the stock to Equal Weight from Overweight and lowered its PT to $110 from $120.
EAF&nbsp;– RBC lowered its PT to $14 from $16 but reiterated its Outperform rating.
ECL&nbsp;– Citigroup lowered its PT to $220 from $245 and maintained its Neutral rating; Deutsche Bank lowered its PT to $180 from $185, keeping its Buy rating.
EMN&nbsp;– RBC raised its PT to $122 from $113, but maintained its Sector Perform rating; UBS also raised its PT to $141 from $138 and reiterated its Buy recommendation.
FMC&nbsp;– RBC trimmed its PT to $121 from $122, reiterating its Outperform rating.
HXL&nbsp;– UBS upgraded the stock to Neutral from Sell, establishing a $52 PT; Morgan Stanley raised its PT to $57 from $55, while retaining its Underweight rating.
PPG&nbsp;– Wells Fargo downgraded the stock to Equal Weight from Overweight and lowered its PT to $170 from $200; Mizuho Securities lowered its PT to $182 from $187, reiterating its Buy recommendation; BMO lowered its PT to $181 from $199, reiterating its Outperform rating; DA Davidson also lowered its PT to $191 from $195, while keeping its Buy recommendation; RBC followed suit, lowering its PT to $169 from $174 and reiterating its Outperform rating; while Barclays cut its PT to $175 from $185 and maintained its Equal Weight rating.
SHW&nbsp;– Deutsche Bank lowered its PT to $330 from $350 and reiterated its Buy recommendation; UBS also lowered its PT to $325 from $350, maintaining a Neutral rating.
DISCLOSURES
Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.  WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.  Dmitry Silversteyn, who is the writer of this report, covers the Chemicals &amp; Materials Technology and BioEconomy sectors for WTR. Mr. Silversteyn and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.  Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.  In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.  The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.  The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.  All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.

Mat-Chem Notes For the Week Ended January 30, 2022

United States

Compass Minerals International, Inc. produces highway deicing salt in North America and the United Kingdom.  The Company also produces general trade salt and sulfate of potash.  Compass Minerals sells its highway deicing salt primarily to state, provincial, county, and municipal highway departments for deicing applications.

Compass Minerals International, Inc (CMP US)

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Mat-Chem Notes For the Week Ended January 30, 2022

WTR-CMI last week. The market recovered somewhat from several days of selling last week, with the S&P 500 eking out a 0.8% gain. However, the...

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