Calgon Carbon Corporation (CCC, Financial) manufactures activated carbon used in the purification, separation and concentration of liquids, gases and other media. In addition to activated carbon, the company also provides disinfection and oxidation services for purifying water, air, food, beverages and industrial process streams primarily in the United States, Europe and Japan.
The company has two operating segments, one the activated carbon segment and the other is the equipment segment. The activated carbon and service segment manufactures and markets granular and powdered activated carbon to remove organic compounds from liquids, gases, water and air.
Further, the company also provides services such as reactivation of spent carbon and leasing, monitoring and maintenance of carbon fills at customer sites along with ion exchange technologies for the treatment of groundwater and process streams.
On the other hand, the Equipment segment provides adsorption systems which are used for liquid and vapor applications so as to control volatile and organic emissions and liquid phase equipment which is used for potable water treatment and de-chlorination applications. It also provides UV oxidation equipment for taste and odor removal in municipal drinking water and for water reuse.
The company serves diverse range of markets with drinking water and waste water treatment being the largest contributing market.
Source: Company Presentation
In this article I will discuss some of the major growth drivers of the company which would support my point that the company has huge growth potential in the coming years.
Market opportunity for activated carbon
According to the company’s latest presentation, the global market for virgin-activated carbon is expected to grow at a compounded annual growth rate of 10.8% over the next three years. Since Calgon carbon has huge market share in the segment, the company is expected to benefit the most with the increase in demand from 2.7 billion pounds in 2012 to 4.5 billion pounds in 2014.
If we look at the company’s 2013 financials, 88% of the revenue came from the activated carbon segment. Considering the current growth estimate, I believe the segment would grow by around 10% in the next few years. This will have a significant impact on the company’s revenue growth and hence on the shareholder value.
Source: Company Presentation
DBP regulations: An opportunity for growth
According DBP rule, U.S. EPA has limited the use of disinfectants / disinfection byproducts to decrease the risk of water contamination due to the reaction of chlorine with natural organic matter. As per the U.S. rule, the country aims at following full compliance by the end of July 2015. This is expected to increase the demand for granular-activated carbon and potable reactivation as the company provides high quality GAC which removes organic precursor compounds. It also offers non-chemical alternative to chloramines.
Also, if we look at the pounds of GAC installed only in North America for municipal drinking water, it is expected to increase from 80 million pounds in 2008 to 140 million pounds in 2016. Though Calgon Carbon has its business primarily in the United States and Japan, but I believe the company also has a huge opportunity in emerging countries like China and India.
These two countries have a combined population of 2.5 billion and according to an article the water crisis in China is huge which is estimated to cut off the country’s GDP by 2%. The scenario for India is no different. I thus believe that the company with its existing offices in the Asia-Pacific region has a huge scope to cater to the demand in the region and can play a big role in the company’s growth.
Stable cash flows
According to the data below, the company has several reactivation contracts with contract length of more than 10 years. This is a key positive for stable cash flow. I believe that, with the increase in demand for reactivation carbon and with higher long term success rate conversion, Calgon Carbon is well positioned for strong growth momentum.
Conclusion
Considering the company’s growth opportunity in the activated carbon segment, DBP regulation and high growth opportunity in emerging markets, I believe Calgon Carbon can be considered a good long term investment.
