Battery And Data Center Demand Will Drive Long-Term Upside Potential

Catalysts

About Cabot

Cabot develops specialty materials, including reinforcement and performance chemicals used across tires, batteries and broader industrial applications.

What are the underlying business or industry changes driving this perspective?

• The Battery Materials product line is scaling on the back of energy storage and EV adoption, with 43% year-over-year revenue growth in the quarter and trailing 12‑month EBITDA margins of about 24%, which directly supports future revenue and EBITDA expansion.
• Cabot’s role in materials for data center power and thermal management, including battery energy storage systems and broader Performance Chemicals used in cables and cooling, ties the company to long duration investment in AI infrastructure, which can underpin volume growth and EBITDA in both Battery Materials and Specialty Carbons.
• Deep relationships with global battery manufacturers and OEMs, highlighted by the multi‑year PowerCo agreement and a portfolio spanning conductive additives, fumed metal oxides and aerogel, position Cabot to win higher value programs over time, which can support mix, gross profit per ton and earnings.
• Capacity rationalization of roughly 120,000 metric tons and targeted cost programs aiming for about $52 million in annual savings combine with yield and efficiency initiatives to lower the cost base, which can support net margins and free cash flow even if pricing is steady.
• A strong balance sheet with about $1.3 billion of liquidity, net debt to EBITDA of 1.5x and moderated capex of US$200 million to US$230 million provides flexibility to fund high conviction growth projects in Battery Materials while continuing shareholder returns, which can support long term earnings power and discretionary free cash flow.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more optimistic perspective on Cabot compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Cabot's revenue will grow by 4.0% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 7.9% today to 12.4% in 3 years time.
• The bullish analysts expect earnings to reach $498.9 million (and earnings per share of $9.9) by about June 2029, up from $281.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 12.0x on those 2029 earnings, down from 16.7x today. This future PE is lower than the current PE for the US Chemicals industry at 26.3x.
• The bullish analysts expect the number of shares outstanding to decline by 2.97% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.68%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Reinforcement Materials EBIT fell 29% year over year despite 3% higher volumes because lower gross profit per ton from 2026 customer agreements and tougher competition in Asia more than offset the volume uplift. If these contract terms and competitive pressures persist, Cabot could see sustained pressure on pricing, segment EBIT and overall earnings.
• Cabot is cutting about 120,000 metric tons of reinforcing carbons capacity in Argentina and the Netherlands and targeting an annual run rate cost benefit of roughly US$22 million by mid 2027. If demand in those regions or globally recovers more than expected or trade flows shift, reduced local capacity could limit volume opportunities and constrain revenue and gross profit per ton.
• The company is leaning heavily on secular growth themes in battery materials, EVs and data center related energy storage. If long term adoption of EVs, battery energy storage systems or data center build outs slows versus current expectations, the Battery Materials product line may not sustain its recent 43% revenue growth or trailing 12 month EBITDA margin of about 24%, which would weigh on segment EBIT, overall earnings and the higher margin mix the bullish thesis assumes.
• Cabot is relying on raw material pass through mechanisms and price increases of up to 20% in Specialty Carbons and Specialty Compounds to recover higher energy and feedstock costs. Over the long run, if customers resist further price increases or competitive offerings undercut pricing, the company may be unable to fully pass through cost inflation, leading to pressure on gross margins, segment EBIT and net margins.
• The outlook for fiscal 2026 earnings per share of US$6.0 to US$6.50 depends heavily on customer demand holding up despite higher energy prices and geopolitical risk in the Middle East. If there is a prolonged demand slowdown, especially in Asia where customers depend more on Middle East raw materials, volumes could soften across both segments, reducing revenue, EBIT and earnings versus the more optimistic scenario embedded in the bullish narrative.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Cabot is $102.0, which represents up to two standard deviations above the consensus price target of $86.83. This valuation is based on what can be assumed as the expectations of Cabot's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $102.0, and the most bearish reporting a price target of just $70.0.
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $4.0 billion, earnings will come to $498.9 million, and it would be trading on a PE ratio of 12.0x, assuming you use a discount rate of 7.7%.
• Given the current share price of $90.7, the analyst price target of $102.0 is 11.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.