Research from Water Tower Research, Water Tower Research

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.

Research from Water Tower Research

Equity Research Firm

Thematic (Sector/Industry)

Multiple Countries / Thematic (Sector/Industry)

<h2>KEY HIGHLIGHTS</h2>
<div></div>
<ul>
<li>WTR-CMI last week.&nbsp;Weekly volatility on the market continued last week, with the Russell 2000 recouping previous week’s losses by appreciating 3.6% and the S&amp;P 500 almost keeping pace with a 3.0% return. Our WTR-CMI index of 30 chemicals and materials technology companies declined 0.5% for the week and only five stocks managed to equal or exceed the S&amp;P 500’s returns, led by LAC (up 8.0%) and including PLL (up 3.0%), both of whom likely benefited from China’s new BEV incentive program. SHW, AXTA, and PPG were also among last week’s winners, benefiting from signs of easing (sequential) raw material pressures and&nbsp;China’s new car sales bounce in June. PKE’s 2Q22 results and guidance may have disappointed versus expectations, resulting in the stock’s performance (5.4%) last week, while both CMP and KWR investors appear to have taken profit after previous week’s rally in both stocks.</li>
<li>Bio-ag financing.&nbsp;Last week we highlighted recent efforts by established ag-chem companies to build and expand their bio-based businesses. However, capital investments go beyond established players and are increasingly going toward emerging innovators, with close to&nbsp;$900 million being invested in global start-ups, primarily in North America and Europe, and primarily in areas of soil health, pesticides, and technologies that lower production costs. Over time, these companies may become viable stand-alone players or provide an acquisition target for larger, more established bio-ag players, such as BIOX and BHIL.</li>
<li>Government bureaucracies undeterred by reality.&nbsp;While one branch of EU bureaucracy is imposing deadlines and mandates intended to drive the transition away from ICE cars and fossil fuels in general, other&nbsp;branches are putting roadblocks in the way of industries looking to make that happen, such as lithium materials suppliers and battery manufacturers working on developing a regional supply chain of critical materials and components. It’s a good thing the timing of the multi-billion dollar investments being considered by various industry players provides time for the EU to adjust its policies before these investments head elsewhere.</li>
<li>Resin prices ease off.&nbsp;Polyethylene and polypropylene costs declined&nbsp;modestly W/W recently on lower raw material costs and slower demand. This may be an indicator that the worst of RM inflation may be behind.</li>
</ul>
<h2>WTR-CMI WEEKLY PERFORMANCE</h2>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/286/050/original/image_924529663101657754603958.png?1657754605" class="editor-image img-responsive" data-smartkarma-image-id="286050"></figure>
<div class="content-remarks">
<p>Source: YCharts; July 8 close</p>
</div>
<h2>Automotive &amp; Transportation Market</h2>
<p>June new car sales still affected by supply chain issues.&nbsp;The only bright spot in global automotive markets so far has been aforementioned 21% Y/Y predicted increase in new car and light truck registrations in China, which may have been the driver of the PPG and AXTA stock price bounce last week, as China is the largest automotive market in the world and PPG and AXTA are two of the top three automotive coatings suppliers. However, China’s strong showing is being driven largely by pent-up demand from April-May COVID-related lockdowns in the country. In other regions, new car registrations continued to decline on a Y/Y basis in June.&nbsp;Germany saw an 18% decline&nbsp;in Y/Y new car registrations during June,&nbsp;the UK saw a 24% Y/Y drop, making it the lowest June since 1996, and&nbsp;US new car registrations declined 13.5%&nbsp;Y/Y last month,&nbsp;with 2Q22 sales down 20.6%&nbsp;Y/Y and YTD sales down 18.3%. Looking for any silver lining, a recent report noted that semiconductor shortages may have peaked, with the last three months showing&nbsp;stable to slightly declining lead times for chip orders. However, order lead times are still double what they were in 2020 and the impact of chip shortages, COVID lockdowns, and the war in Ukraine are expected to continue to affect the automotive supply chain and thus production into 2023, as noted by the automotive union in Italy, which predicted the country’s&nbsp;Stellantis plants will put out 200,000 fewer cars&nbsp;in 2022 due in large part to supply chain issues.</p>
<h2>EVs &amp; Battery Ecosystem</h2>
<p>Damn the (government regulation) torpedoes – full steam ahead.&nbsp;Apparently undeterred by EU regulators’ efforts to classify lithium salts as reproductive and developmental toxins,&nbsp;VW recently reaffirmed its plans to invest $20 billion&nbsp;in building its battery business, including funding battery manufacturers and raw material suppliers as needed to ensure sufficient quantities of materials to affect its goal of becoming the dominant EV player globally. The plan includes six EU-based battery plants and two North American plants, as well as investments in other battery manufacturers and material suppliers. As part of the commitment, VW was a participant in the recent round of&nbsp;the Northvolt capital raise, which involved $1.1 billion in convertible notes, with proceeds to be used to expand the company’s European battery production. Meanwhile, another aspiring&nbsp;European battery manufacturer, Britishvolt, signed an agreement with South Korean company Posco Chemical for the development and supply of anode and cathode materials for electric car batteries. As previously mentioned, it remains to be seen if car and battery companies’ appetite for capital investment into battery and material infrastructure in the EU will remain should Brussels continue with its plans to raise lithium salts to the category of “substance of very high concern” alongside severely carcinogenic and mutagenic toxins, implying that the EU would want to gradually phase them out by restricting their usage. Regardless, these developments, to the extent they indicate growing capital investment by downstream customers in upstream suppliers, imply upside for such developing material suppliers as PLL, LAC, WWR, and NMG, which may need to rely on partnerships and capital infusions from strategic customers to bring their mine and conversion plant projects to fruition.</p>
<h2>Ag-Chem and Ag-Tech</h2>
<p>The fight for yield continues.&nbsp;Conditions for major row crops in the US, such as corn and soybeans,&nbsp;deteriorated slightly last week. Corn crop conditions were rated good to excellent, declining to 64% from the prior week’s 65%, as 7% of the crop is “silking” compared with the five-year average of 11% for this time. Similarly, in soybeans, crop conditions were rated good to excellent, declining to 63% from the previous week’s 65%, with 16% of the crop blooming, compared with the five-year average of 22% for early July. The triple punch of rain, hail, and high winds that moved through the corn belt in recent days may have been behind the worsening of crop conditions, in addition to providing opportunities for pests to infiltrate damaged plants and rob the fields of yield. However, this may provide an opportunity for&nbsp;ag-chem companies to sell incrementally more&nbsp;in-season insecticides and other pesticides as farmers struggle to maximize their yields to take advantage of high commodity prices and secure sufficient funds to invest into next season’s inputs. We see this as a potential positive for companies such as FMC, which is “over-represented” in insecticides, as well as CTVA and emerging bio-based crop protection suppliers, such as BIOX and BHIL.</p>
<p>Planting decisions being made to maximize returns, as income concerns grow.&nbsp;The Purdue University and CME Group’s&nbsp;Ag Economy Barometer index&nbsp;declined 2 points in June from May to a reading of 97, compared with 137 last June. Fifty-one percent of survey respondents said they expect their farms to be worse off financially a year from now, the most negative response received to this question since data collection began in 2015. Higher input costs and availability of inputs continue to weigh on farmers’ sentiment and expectations. Twenty percent of farmers surveyed indicated that they plan to change their crop mix next year, with most looking to plant more soybeans, as overall input costs are lower in that market compared with corn, largely due to less fertilizer volumes required to produce the crop. Of the farmers who planted winter wheat in the fall of 2021, approximately a quarter said they plan to increase their winter wheat acreage this fall, while 14% of those who did not plant winter wheat last fall said they intend to plant some winter wheat this fall, given the expected shortfall of global wheat supply due to the Russian invasion of Ukraine.</p>
<h2>Rating and Price Target Changes</h2>
<p>ALB –&nbsp;Deutsche Bank lowered its price target (PT) to $255 from $320 and reiterated its Buy rating.</p>
<p>ASH –&nbsp;Mizuho Securities raised its PT to $138 from $135 and reiterated its Buy rating.</p>
<p>AVNT –&nbsp;Wells Fargo lowered its PT to $63 from $65 but maintained its Overweight recommendation.</p>
<p>LAC –&nbsp;Deutsche Bank lowered its PT to $33 from $36 and reiterated its Buy rating.</p>
<p>LTHM –&nbsp;Deutsche Bank lowered its PT to $24 from $29 and maintained its Hold recommendation.</p>
<p>MTRN –&nbsp;CL King initiated coverage of the stock with a Buy rating and $95 PT; KeyBank lowered its PT to $100 from $106 and reiterated its Outperform rating.</p>
<p>PPG –&nbsp;RBC lowered its PT to $141 from $162 and reiterated its Outperform rating.</p>
<p>RPM –&nbsp;RBC lowered its PT to $86 from $93 and maintained its Sector Perform rating.</p>
<p>SHW –&nbsp;Evercore ISI lowered its PT to $290 from $295 and reiterated its Outperform rating; RBC lowered its PT to $312 from $342 and reiterated its Outperform rating.</p>
<h2>Recent WTR Publications and Upcoming Events</h2>
<p>Management Series Report – Marrone Bio Innovations CEO Kevin Helash</p>
<p>Management Series Report – Westwater Resources Executive Chairman Terence Cryan and CAO Steven Cates</p>
<p>Initiation of Coverage – Westwater Resources, Inc.</p>
<h2>DISCLOSURES</h2>
<div></div>
<p>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.<br><br>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.<br><br>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.<br><br>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.<br><br>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.<br><br>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.<br><br>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.<br><br>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.</p>

KEY HIGHLIGHTS


WTR-CMI last week.&nbsp;Weekly volatility on the market continued last week, with the Russell 2000 recouping previous week’s losses by appreciating 3.6% and the S&amp;P 500 almost keeping pace with a 3.0% return. Our WTR-CMI index of 30 chemicals and materials technology companies declined 0.5% for the week and only five stocks managed to equal or exceed the S&amp;P 500’s returns, led by LAC (up 8.0%) and including PLL (up 3.0%), both of whom likely benefited from China’s new BEV incentive program. SHW, AXTA, and PPG were also among last week’s winners, benefiting from signs of easing (sequential) raw material pressures and&nbsp;China’s new car sales bounce in June. PKE’s 2Q22 results and guidance may have disappointed versus expectations, resulting in the stock’s performance (5.4%) last week, while both CMP and KWR investors appear to have taken profit after previous week’s rally in both stocks.
Bio-ag financing.&nbsp;Last week we highlighted recent efforts by established ag-chem companies to build and expand their bio-based businesses. However, capital investments go beyond established players and are increasingly going toward emerging innovators, with close to&nbsp;$900 million being invested in global start-ups, primarily in North America and Europe, and primarily in areas of soil health, pesticides, and technologies that lower production costs. Over time, these companies may become viable stand-alone players or provide an acquisition target for larger, more established bio-ag players, such as BIOX and BHIL.
Government bureaucracies undeterred by reality.&nbsp;While one branch of EU bureaucracy is imposing deadlines and mandates intended to drive the transition away from ICE cars and fossil fuels in general, other&nbsp;branches are putting roadblocks in the way of industries looking to make that happen, such as lithium materials suppliers and battery manufacturers working on developing a regional supply chain of critical materials and components. It’s a good thing the timing of the multi-billion dollar investments being considered by various industry players provides time for the EU to adjust its policies before these investments head elsewhere.
Resin prices ease off.&nbsp;Polyethylene and polypropylene costs declined&nbsp;modestly W/W recently on lower raw material costs and slower demand. This may be an indicator that the worst of RM inflation may be behind.

WTR-CMI WEEKLY PERFORMANCE


Source: YCharts; July 8 close

Automotive &amp; Transportation Market
June new car sales still affected by supply chain issues.&nbsp;The only bright spot in global automotive markets so far has been aforementioned 21% Y/Y predicted increase in new car and light truck registrations in China, which may have been the driver of the PPG and AXTA stock price bounce last week, as China is the largest automotive market in the world and PPG and AXTA are two of the top three automotive coatings suppliers. However, China’s strong showing is being driven largely by pent-up demand from April-May COVID-related lockdowns in the country. In other regions, new car registrations continued to decline on a Y/Y basis in June.&nbsp;Germany saw an 18% decline&nbsp;in Y/Y new car registrations during June,&nbsp;the UK saw a 24% Y/Y drop, making it the lowest June since 1996, and&nbsp;US new car registrations declined 13.5%&nbsp;Y/Y last month,&nbsp;with 2Q22 sales down 20.6%&nbsp;Y/Y and YTD sales down 18.3%. Looking for any silver lining, a recent report noted that semiconductor shortages may have peaked, with the last three months showing&nbsp;stable to slightly declining lead times for chip orders. However, order lead times are still double what they were in 2020 and the impact of chip shortages, COVID lockdowns, and the war in Ukraine are expected to continue to affect the automotive supply chain and thus production into 2023, as noted by the automotive union in Italy, which predicted the country’s&nbsp;Stellantis plants will put out 200,000 fewer cars&nbsp;in 2022 due in large part to supply chain issues.
EVs &amp; Battery Ecosystem
Damn the (government regulation) torpedoes – full steam ahead.&nbsp;Apparently undeterred by EU regulators’ efforts to classify lithium salts as reproductive and developmental toxins,&nbsp;VW recently reaffirmed its plans to invest $20 billion&nbsp;in building its battery business, including funding battery manufacturers and raw material suppliers as needed to ensure sufficient quantities of materials to affect its goal of becoming the dominant EV player globally. The plan includes six EU-based battery plants and two North American plants, as well as investments in other battery manufacturers and material suppliers. As part of the commitment, VW was a participant in the recent round of&nbsp;the Northvolt capital raise, which involved $1.1 billion in convertible notes, with proceeds to be used to expand the company’s European battery production. Meanwhile, another aspiring&nbsp;European battery manufacturer, Britishvolt, signed an agreement with South Korean company Posco Chemical for the development and supply of anode and cathode materials for electric car batteries. As previously mentioned, it remains to be seen if car and battery companies’ appetite for capital investment into battery and material infrastructure in the EU will remain should Brussels continue with its plans to raise lithium salts to the category of “substance of very high concern” alongside severely carcinogenic and mutagenic toxins, implying that the EU would want to gradually phase them out by restricting their usage. Regardless, these developments, to the extent they indicate growing capital investment by downstream customers in upstream suppliers, imply upside for such developing material suppliers as PLL, LAC, WWR, and NMG, which may need to rely on partnerships and capital infusions from strategic customers to bring their mine and conversion plant projects to fruition.
Ag-Chem and Ag-Tech
The fight for yield continues.&nbsp;Conditions for major row crops in the US, such as corn and soybeans,&nbsp;deteriorated slightly last week. Corn crop conditions were rated good to excellent, declining to 64% from the prior week’s 65%, as 7% of the crop is “silking” compared with the five-year average of 11% for this time. Similarly, in soybeans, crop conditions were rated good to excellent, declining to 63% from the previous week’s 65%, with 16% of the crop blooming, compared with the five-year average of 22% for early July. The triple punch of rain, hail, and high winds that moved through the corn belt in recent days may have been behind the worsening of crop conditions, in addition to providing opportunities for pests to infiltrate damaged plants and rob the fields of yield. However, this may provide an opportunity for&nbsp;ag-chem companies to sell incrementally more&nbsp;in-season insecticides and other pesticides as farmers struggle to maximize their yields to take advantage of high commodity prices and secure sufficient funds to invest into next season’s inputs. We see this as a potential positive for companies such as FMC, which is “over-represented” in insecticides, as well as CTVA and emerging bio-based crop protection suppliers, such as BIOX and BHIL.
Planting decisions being made to maximize returns, as income concerns grow.&nbsp;The Purdue University and CME Group’s&nbsp;Ag Economy Barometer index&nbsp;declined 2 points in June from May to a reading of 97, compared with 137 last June. Fifty-one percent of survey respondents said they expect their farms to be worse off financially a year from now, the most negative response received to this question since data collection began in 2015. Higher input costs and availability of inputs continue to weigh on farmers’ sentiment and expectations. Twenty percent of farmers surveyed indicated that they plan to change their crop mix next year, with most looking to plant more soybeans, as overall input costs are lower in that market compared with corn, largely due to less fertilizer volumes required to produce the crop. Of the farmers who planted winter wheat in the fall of 2021, approximately a quarter said they plan to increase their winter wheat acreage this fall, while 14% of those who did not plant winter wheat last fall said they intend to plant some winter wheat this fall, given the expected shortfall of global wheat supply due to the Russian invasion of Ukraine.
Rating and Price Target Changes
ALB –&nbsp;Deutsche Bank lowered its price target (PT) to $255 from $320 and reiterated its Buy rating.
ASH –&nbsp;Mizuho Securities raised its PT to $138 from $135 and reiterated its Buy rating.
AVNT –&nbsp;Wells Fargo lowered its PT to $63 from $65 but maintained its Overweight recommendation.
LAC –&nbsp;Deutsche Bank lowered its PT to $33 from $36 and reiterated its Buy rating.
LTHM –&nbsp;Deutsche Bank lowered its PT to $24 from $29 and maintained its Hold recommendation.
MTRN –&nbsp;CL King initiated coverage of the stock with a Buy rating and $95 PT; KeyBank lowered its PT to $100 from $106 and reiterated its Outperform rating.
PPG –&nbsp;RBC lowered its PT to $141 from $162 and reiterated its Outperform rating.
RPM –&nbsp;RBC lowered its PT to $86 from $93 and maintained its Sector Perform rating.
SHW –&nbsp;Evercore ISI lowered its PT to $290 from $295 and reiterated its Outperform rating; RBC lowered its PT to $312 from $342 and reiterated its Outperform rating.
Recent WTR Publications and Upcoming Events
Management Series Report – Marrone Bio Innovations CEO Kevin Helash
Management Series Report – Westwater Resources Executive Chairman Terence Cryan and CAO Steven Cates
Initiation of Coverage – Westwater Resources, Inc.
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 July 10, 2022