 Good day, fellow investors! It's always good to copy Mimic great investors and in this video I want to show you my analysis of GrafTech, a company that monish pubry famous for looking at price-to-earnings ratios of one company's recently bought with a nice stake in his portfolio. So in this video we'll analyze GrafTech and we'll see the risks and the rewards, perhaps try to find why Monish bought that and then see whether this fits your portfolio or not. There is one reason that I say okay I might watch it but I'm looking for a little bit better lower risk investments. Monish has a good theory there he'll probably do well within his portfolio but always keep in mind that when you look at this hedge funds or investment managers they always put it in a portfolio perspective they might be long this if this works out they do five times their money if it doesn't they'll do on something else we usually don't see the something else. So let's start and analyze GrafTech. So overview GrafTech is a provider of high power graphite electrodes for the growing electric arc furnace steel market. There is a blast furnace to make steel and electric arc. Electric arc needs graphite electrodes to produce very high temperatures to make that steel. The company is an integrated producer as it owns Seedrift Coke which produces 75% of the needed petroleum needle coke to make graphic electrodes. Higher needle coke prices create instability in the sector and therefore it's good to be integrated. The company practically went bust in 2015 when Brookfield acquired it for 1.2 billion. Graphite electrode prices were around 2600 per ton in 2016 while those are around 10 000 now. So what was the case in 2016 might happen again and this is a big risk because the market can change very quickly after all this is a commodity. So that's something to keep in mind. The management moved however very quickly and switched from mostly selling on spot to immediately making long term three to five year take or pay contracts to fix the fix the high price and to create stability from the company. So that's what Brookfield brings to you plus the cash to do things to improve production and everything. Now is Graphtex margin and a PE ratio of one really what do we have there. As they said they have this take or pay agreements at high prices which will lead to margins good margins and good profits for the coming three years. So over the next three years they will have they have already contracted 4.5 billion in revenue at the high prices thus high margins you can expect that the cash flows per year will be around 750-800 million as those are now. So that is Graphtex margin of safety. So this is what Pabra is practically buying. He's buying paying 3 billion now to buy 3 billion in free cash flows over the coming four years. So whatever Graphtex does after year four will be free for Pabrai. However if electrode prices go down then there will be things will get very risky for Graphtex because yes they have good prices good margins good cash flows but they also have a long-term debt of 2 billion. They intended to pay it down over the years but you never know with such high debts and in such a volatile environment as graphic electrodes anything can happen. And here we come to Brookfield and their relation to Graphtex. They bought it financed it lent a lot of money to it and now they want to get rid of it. When the stock price hit 19 they immediately sold the shares to Graphtex for a buyback. But that already tells you okay Brookfield wants to get rid of this so perhaps the upside is limited perhaps at 17-20 they'll say okay get rid of it so the upside is not five times on a price earnings ratio of one the upside might be only 50-100% so it's important to put things into a perspective of the big owner. Before selling before going public they didn't have the money to issue a dividend so they issued a loan in the form of a dividend to Brookfield and saying here is your dividend but we'll pay you six months later when we get the money. So Brookfield even took 750 million out of the company prior to going public in a form of a provisionary note. So there is a lot of let's say big owner that dealings with the company that is not really for the small shareholder and perhaps Pabrai looked it in I didn't look deep into it but it's a risk that I'm seeing plus the debt. Brookfield wants to get their money they have two billion in the company from there into the company so they first want to get out debt by having the company payback or something so or selling the company so it's very intriguing how this will go forward and if those electrode prices go down then we might see trouble over the horizon. Over the very long term however I think Pabrai is bullish on steelmaking especially as he's from India and the Indian economy is about to start on the voyage that China already that happened already in China. Let's dig more into the steel market because that's also a key factor when analyzing graph tech. So EF steelmaking global steel prices have been softening a bit if there is a recession those will soft if there is no recession those will stay strong but the stock price stock market usually predicts five of the coming two recessions now probably five out of one coming recession so the stock price already declined significantly from the highs after the IPO. However if there is a decline in the meant for steel graphic electrode prices can easily tank as it was the case in 2016 when it fell approximately 2500 per metric ton. However on the other hand on the positive on the upside the electric arc furnace steel sector remains positive there will be a nice future for graph tech. If China goes from 9% EAF to 20% steel production demand for electrodes will remain high no matter what happens in the environment. Petroleum needle coke that's used to create these graphic electrodes now has demand coming also from making those negative electrodes with lithium eion batteries so more competition higher prices that might keep prices higher of electrodes. China is trying to produce the necessary needle coke by using coal but the quality might not be sufficient to jeopardize graph tech positions. Albeit there are many many new productions expansions entering the field which is also a big negative for graph tech so one has to watch brookfield and furnace needle coke market EAF market steel market so this is the volatility and we don't know whether Pabrai is hedged somewhere with it. On the long term the outlook is very positive much more iron ore steel metals will be needed so much more graphite electrodes will be needed. When I put this into a conclusion why did Pabrai buy this let's say that down 100% in case of brookfield taking out the money and not being there a good environment I give a 15% chance to zero down 50% 15% chance to let's say six seven up two times 40% three times 20% and five times which is also possible because if the company continues to make money as it does after four years you're practically paying 700 million now to get 700 million in cash flows for the long term so that's a price earnings ratio of one that will probably become a five beggar so 10% chance so the value of this company is 25 over five years if I discount that to the present value then I get to the current stock market price so it's not really a buy for me but you never know what can happen perhaps his upside percentages are much higher or he's hedged with something else some Chinese or Indian company that will do good producing petroleum coke if they make it I don't know in any in any case I think I'm looking for simpler investments lower risk investments with higher upsides based on not so much the management issues not so much market issues but based simply on irrationality of the market on long term trends this might be something fitting however I don't have the confidence because I just researched this one day if I keep following the company over year two year three years a lot will happen and then I might buy over two three years I need a lot of time to get the confidence to buy something to be really convinced okay this is it I have already a nice portfolio so this at this moment and doesn't fit the threshold perhaps next year it will I'll keep it on my list I'll analyze I'll update I'll look into the earnings and then who knows when perhaps five years ten years down the road investing is a very very long-term game thank you for watching if you want to see my portfolio don't forget to check my stock market research platform it's really a bargain and if you have any questions send me an email or send me a message on facebook I'll see you in the next video