[SGL] SGL Carbon: Two Companies, One Stock

When your best division prints cash and your worst one burns it, which one defines you?

Origins

In 1879, Thomas Edison successfully tested his first functional incandescent light bulb, illuminating his laboratory in Menlo Park, New Jersey. That same year, on the other side of the Atlantic, watching an electric street lamp was like seeing a tiny sun eat itself. Arc lamps were all the rage back then. The light came from two carbon rods, slowly burning away as electricity arced between them. Every day, someone had to climb up and replace these carbon "candles" - imagine being a lamp maintenance guy in 1879 Berlin.

That's where our story begins: at the Kaiserpassage, where a small Siemens subsidiary had just started making these sacrificial carbon rods. That company would become SGL Carbon - but first, it needed to survive two world wars, three waves of industrial revolution, and a price-fixing scandal that nearly broke it. You could say it started with a spark.

The early years set a pattern that holds today: find where carbon meets new technology, then dig in deep. By 1914, the Siemens brothers were pumping out half a million carbon rods daily. They built plants in Berlin and Upper Silesia, but the real game-changer came in 1922 with the Meitingen facility in Bavaria. Why Meitingen? Cheap power and good logistics - the same reasons Toyota picks plant locations today. The company kept expanding through mergers, eventually landing under chemical giant Hoechst AG's wing in 1953. Under Hoechst, it transformed from a components maker into a materials science pioneer.

The modern SGL Carbon story really kicks off in 1992, when German SIGRI merged with America's Great Lakes Carbon. The marriage made sense: combine German engineering with American scale. But then things got … messy.

Between 1992 and 1997, SGL ran a global price-fixing cartel for graphite electrodes - those massive carbon rods used in steel furnaces. Eight companies controlled almost the entire world market, and they weren't shy about using that power. They met regularly to divvy up customers and set prices. Steel makers paid through the nose. When regulators caught on, the fines were brutal - €80.2 million in Europe, $135 million in the US.

What SGL did next was creative, to say the least. Facing massive civil lawsuits from angry steel companies, they tried to declare bankruptcy in the US - while remaining perfectly solvent in Europe. The courts weren't amused. The Third Circuit basically told them "nice try" and kicked the case out. SGL had to pay up. Most companies would've crumpled under the weight of all those fines and lawsuits. Instead, SGL did something clever: they pivoted hard into high-tech materials.

They started developing carbon fibre composites, battery materials, and specialized graphite products. This caught BMW's attention. By 2009, SGL and BMW were joint-venture partners making carbon fibre for the i3 electric car. Volkswagen noticed too. Today, the two automakers own over a quarter of SGL. The rest of the 2010s was all about doubling down on future tech: more EV materials, more lightweight composites, more specialized graphite. They even got €42.9 million in EU funding in 2021 to develop better battery materials.

Quite a journey from making lamp rods to becoming the backbone of Germany's electric vehicle ambitions. The company that lit up Berlin's streets now helps German automakers light up the autobahn - just with considerably less spark and a lot more sophistication.

How do they make money

Essentially, SGL Carbon sells stuff made of … carbon. Who would've guessed?

Specifically, very specialized forms of carbon - graphite components, carbon fibres, and composite materials. Their customers use these in everything from electric vehicles to wind turbines (though lately, mostly just the electric vehicles - more on that wind turbine drama in a moment). The company has four divisions, but one stands above the rest: Graphite Solutions, making up about 53% of revenue and generating margins that would make most industrial companies envious - around 25%.

Let's talk about where the real money is made. When chipmakers produce silicon carbide chips - the kind used in electric vehicles - they need ultra-precise graphite components. The manufacturing process involves extremely high temperatures where most materials would melt or deform. SGL's graphite components maintain their shape and properties, which directly affects how many good chips come out at the end. Semiconductor manufacturers literally can't afford to use lower-quality alternatives. It's a bit like Formula 1 racing - when you're pushing the limits of performance, you don't go bargain hunting on eBay for critical components.

Their Process Technology division (14% of revenue) builds equipment for chemical companies, focusing on corrosion-resistant applications - think acid tanks and pipes. Composite Solutions (12%) makes carbon fibre parts for automotive companies. Then there's the Carbon Fibres division (21%), which supplies materials for wind turbines but currently operates at a loss - turns out even renewable energy can face headwinds. Each division handles extreme conditions in its own way, whether it's heat, chemicals, or structural forces.

Here's where the business model gets properly clever, not just consultant-presentation clever. Their semiconductor customers pay large deposits - sometimes years in advance - to secure future production capacity. In 2023, these prepayments totalled €31 million. That's customer money funding SGL's expansion, which then locks in future revenue.

The company runs a "local for local" production strategy, with plants near major customers in Europe, Asia, and the US. In a world of increasing trade tensions, having production on three continents looks less like inefficient redundancy and more like smart risk management.

Numbers

SGL Carbon makes €1.09 billion in annual revenue. That's decent for a specialty materials company, though what matters more is where that revenue comes from. About half flows from their Graphite Solutions division - think ultra-precise components for semiconductor manufacturing. The other half splits between carbon fibres, composite materials, and chemical equipment.

Their EBITDA margin runs at 12.6%. EBITDA - earnings before interest, taxes, depreciation, and amortization - shows how much cash the business generates from operations. For every €100 in sales, they keep €12.60 before paying for new equipment or dealing with accountants. Industrial companies typically run between 10% and 15%, so they're right in the sweet spot.

The margins vary wildly by division. Graphite Solutions hits 25% - semiconductor customers pay up for precision. Process Technology manages 24%. But Carbon Fibres actually loses money, with negative margins. When your best division makes 25 cents per euro and your worst loses money, something has to give.

Their debt looks manageable these days. Net debt sits at 0.76 times EBITDA - meaning they could pay off all debt in about nine months if they used all their operating cash. Banks start getting nervous above 3.0x, so there's plenty of headroom.

The balance sheet shows €374 million in inventory - about four months of production. That's high, but specialty materials companies need buffers. You can't tell TSMC "sorry, we're out of graphite components, check back next week."

Let's talk about those customer prepayments - €116.5 million sitting on SGL's balance sheet. These aren't regular "I'll pay you next month" arrangements. Semiconductor manufacturers are paying SGL years in advance to secure graphite components. Why? Because these aren't your garden variety graphite parts. They're ultra-precise components used to make silicon carbide chips - the special chips that help electric vehicles squeeze more range out of their batteries. A single flaw in these components can ruin an entire batch of chips worth millions.

The prepayment number has tripled since 2021, from €30.1 million to €116.5 million. Chip manufacturers don't usually part with cash years early unless they absolutely have to. When they do, it's because they're betting on massive demand growth and want to lock in critical suppliers. SGL received €31 million in new prepayments just in 2023, mostly from European and Asian customers racing to secure local supply chains. Though there's a wrinkle here - recent quarters show some softening in electric vehicle demand, which might explain why prepayment growth slowed in late 2024.

The stock trades at 4.5 times next year's EBITDA. Similar industrial companies trade at 8-10x. Markets seem sceptical about their transformation from old-school carbon producer to high-tech materials company. Perhaps too sceptical.

Their R&D spending runs at 2.7% of sales - €29.7 million annually. That's light for a company betting its future on technical innovation. German specialty chemical companies typically spend 3-4%.

Return on capital employed hits 5.5%. Meaning for every €100 of capital invested in machines, inventory, and operations, they generate €5.50 in operating profit. The cost of capital probably runs around 8% - so they're not quite earning their keep yet.

Revenue per employee comes in at €226,000 - low for a specialty materials company. But they're still carrying legacy operations and underutilized carbon fibre plants. It's like having a Ferrari dealership attached to a used car lot - the averages don't tell the full story.

People

Running a specialty materials company requires three things: deep technical knowledge, patient capital, and skilled workers who understand the difference between good carbon and great carbon. SGL Carbon has all three, arranged in an distinctly German corporate structure.

Ownership tells us who really calls the shots. Here, it's an unusual alliance: Susanne Klatten owns 28.5% through her investment vehicle, BMW holds 18.4%, and Volkswagen controls 7.4%. The remaining 41.6% trades freely. When your biggest customers own nearly half your company, it changes how you make decisions. Every board meeting includes people who understand both sides of the transaction - they know exactly what that graphite component means for their electric vehicle programs.

The company just engineered a smooth leadership transition. Andreas Klein steps up from running the critical Graphite Solutions division to become CEO, bringing deep experience from Bayer and Lanxess - two German chemical giants where mastery of complex industrial processes is the daily bread. Klein will keep direct control of the Graphite Solutions unit while serving as CEO, literally putting the company's core profit engine in the corner office. He's joined by Thomas Dippold, whose contract as CFO was extended for five years, and Stephan Bühler, whose background includes 21 years handling mergers and acquisitions at Siemens. This expanded three-person board suggests SGL is gearing up for more than just steady-state operations.

The workforce reflects both tradition and transformation. Of their 4,583 employees, 45% work in Germany, centered around places like Meitingen where they've made carbon products since 1920. The technical complexity shows in their concentration: 90% of production happens at just nine sites. When you're making graphite components that can make or break a €100 million chip production run, you want your best people clustered together.

Recent shifts tell an interesting story. The Asian workforce dropped 14.2% while U.S. operations grew slightly. That's practically unheard of for a technology materials company right now. Most are rushing to build Asian capacity. But SGL's "local for local" strategy means they're building where their customers are investing - and German and American chipmakers are reshoring aggressively.

The company runs a strong technical training program, maintaining expertise that takes years to develop. You can't just walk in off the street and start making precision graphite components for semiconductor manufacturing. The institutional knowledge runs deep - some families have worked at sites like Meitingen for generations. That's typical for German industrial companies, where technical skills often pass from parent to child like a family trade. For investors, this creates an intriguing moat - try replicating five decades of accumulated knowledge about how carbon behaves at 2,800 degrees Celsius when your competition keeps their recipes as secret as a Bavarian brewery.

Competition & the Moat(?)

Carbon is everywhere. The pencil on your desk, the diamond in a ring, the graphite in a battery - all carbon, just arranged differently. Making money from carbon means doing something special with it that others can't easily copy.

SGL faces different competitors in each market. In basic carbon fibres, they compete with everyone from small Chinese manufacturers to industrial giants like Toray. The semiconductor materials space brings specialized players like Morgan Advanced Materials and Mersen. Then there's the automotive components market, where they sometimes compete with their own customers.

The carbon fibre business shows what happens when too many companies chase the same customers. We saw earlier how this division operates at a loss despite the wind energy boom. When everyone can make the same thing, nobody makes money.

As we covered, the semiconductor story runs differently. Making graphite components for chip manufacturing requires almost absurd precision. The tiniest flaw can ruin millions of dollars worth of chips. We mentioned those customer prepayments earlier - they're a symptom of something deeper. Customers lock in supply years ahead because switching suppliers isn't just expensive, it's risky.

Technical barriers create real protection here. Getting qualified as a supplier takes years. The manufacturing process requires deep knowledge accumulated over decades. Each graphite component behaves slightly differently in specific processes - once a chip manufacturer validates a supplier's components, they stick with them like a superstitious baseball player with a lucky bat.

Geography adds another layer. Chip manufacturers want suppliers nearby - these components are too critical to risk shipping delays or trade disputes. We saw how SGL's "local for local" strategy plays out: plants near key customers in Europe, Asia, and America. Building and qualifying new plants takes years and serious capital. Not many competitors can match this geographic spread.

The auto industry ties create an unusual dynamic. Earlier we discussed BMW and VW's ownership stakes. Those —mean early insight into future programs. Other suppliers might guess what electric vehicle programs are coming - SGL helps design them.

But these advantages only work in specific niches. SGL's commodity carbon businesses remain vulnerable to competition. Anyone with enough capital can build a carbon fibre plant. The real protection comes from process complexity and customer relationships in high-precision applications. Much like carbon itself, SGL's competitive position depends entirely on how it's structured.

Mr. Market

The stock market has decided SGL Carbon is worth €468 million today. That's what you get when you multiply the €3.83 share price by 122 million shares outstanding. Two years ago, the market thought it was worth almost three times that.

SGL peaked above €9.50 in early 2023, riding high on semiconductor growth and electric vehicle enthusiasm. Then the market started a systematic reassessment. Quarter by quarter, growth expectations came down. The stock drifted lower through 2023, finding temporary support around €6-7.

The real breakdown came in October 2024. Management announced they'd need to write down €60-80 million in carbon fibre assets. The stock dropped below €5 and kept going. Who knew carbon fibre could be so heavy?

Markets don't love it when you admit
your assets are worth less than you claimed.

Today's valuation requires some financial arithmetic. SGL trades at 4.5 times EBITDA - essentially the company's operating cash flow. Their semiconductor-focused peers trade at 8-10 times EBITDA. The market is saying SGL is worth half what similar companies are worth.

Some context helps here. The Graphite Solutions division made €104.3 million in EBITDA over nine months, with 25.3% margins. That's the kind of business that usually commands premium valuations. Meanwhile, Carbon Fibres lost €7.9 million. Markets struggle with this contrast.

Here's where market psychology gets interesting. Semiconductor customers have paid €116.5 million upfront for future supply. That's actual cash from companies who know exactly what they're buying. Yet the market values the entire company at just 4x those prepayments. Though even these prepayments tell a story - they grew from €30.1 million in 2021 to €116.5 million in 2023, but only €31 million came in during 2023. The market sees that slowdown.

The stock could absolutely keep dropping. Markets can be surprisingly creative about finding new things to worry about. But at some point, valuations start to matter. You're currently paying about half what you'd pay for a pure-play semiconductor supplier, and getting a carbon fibre business thrown in for free - even if that feels more like a liability than an asset right now.

Think of it this way: The market is pricing SGL like a carbon fibre company with a semiconductor hobby, when maybe it should be pricing it like a semiconductor supplier with a carbon fibre problem.

Bear Thesis

The SGL Carbon bear thesis writes itself these days. Start with a dying wind energy division burning cash, add a semiconductor business hitting the brakes, sprinkle in some German industrial malaise, and you've got yourself quite the challenging setup.

This might sound harsh. Let's unpack it properly.

SGL's semiconductor story recently shifted from boom to bust. Their silicon carbide materials - critical components in electric vehicle power systems - were supposed to ride the EV wave. Instead, quarterly semiconductor sales dropped 15.3% to €53.9 million. Electric vehicle sales fell off a cliff in early 2024, down 26% in Q1. More worrying? Management expects "no growth in SiC demand in 2025." That's corporate speak for "our growth engine stalled."

The Carbon Fibres division reads like a case study in market timing gone wrong. Wind energy sales collapsed 55.5%. The division bleeds cash - negative €12.8 million EBITDA in Q3, including €9.3 million in restructuring costs. Management's solution? They're considering selling it. In this market, that's like trying to sell an umbrella during a drought.

Speaking of timing, let's talk about German manufacturing. SGL operates in a country where energy costs run 2-4x higher than U.S. levels. German GDP contracted in 2024 (-0.2%) with a weak 2025 forecast (0.3%). Their industrial base faces what economists politely call "structural challenges." Translation: high costs, tough competition, and no easy fixes.

The numbers paint a clear decline. Revenue dropped sequentially through 2024:

• Q1: €273 million

• Q2: €265 million

• Q3: €244 million

Cash flow tells a similar story. Operating cash flow fell 35.4%, with working capital deteriorating from negative €8.8 million to negative €12.1 million. Yet they maintain high capital expenditure at 1.56 times depreciation and amortization. That's like renovating your house while the foundation cracks.

Even their wins look shaky. Process Technologies grew 16% but order intake peaked in 2024. Their Composite Solutions division lost a key automotive contract, sending sales down 16.7% and EBITDA tumbling 41.5%.

The market sees it too. Analysts cut their net asset value estimates by 14.9% (from €12.7 to €10.8) and slashed discounted cash flow valuations by 19.9% (from €10.7 to €8.55). When financial models get haircuts this big, it usually means the story changed.

Management changes complete the picture. The CEO departs early, replaced by the head of their largest division - the same division showing sequential declines. They've also added a legal expert to the board, specifically to handle "strategic options" for Carbon Fibres. That's like hiring a real estate agent before telling your spouse you're thinking about moving.

Sure, SGL trades at 4.5x EBITDA while peers command 8-10x multiples. Value investors might see opportunity. But sometimes cheap stocks are cheap for a reason. Between structural challenges, market headwinds, and limited strategic options, SGL faces an uphill battle. The bears think that hill might be steeper than the market realizes.

Bull Thesis

SGL Carbon sells hope disguised as graphite components. Not the "maybe things will get better" kind of hope, but the "we literally cannot make silicon carbide chips without these parts" variety. Their semiconductor customers pay hundreds of millions in advance - years ahead - just to secure supply. That's the core bull case: they make things other people desperately need and cannot easily replace.

Simple idea. Complex execution. Making ultra-precise graphite components for semiconductor manufacturing requires decades of accumulated knowledge. You don't learn this from YouTube tutorials. The tiniest flaw in these components can ruin an entire production run of chips worth millions. No semiconductor manufacturer wants to explain to shareholders why they gambled on an unproven supplier to save a few euros.

The financials back this up. Their Graphite Solutions division generates 25.3% margins, up 1.5% from last year. For context, that's the kind of margin you typically see in enterprise software, not industrial manufacturing. Think about that - they're achieving software-like margins selling carbon. The division brought in €104.3 million in EBITDA over nine months despite what everyone keeps calling a semiconductor downturn.

Speaking of that downturn... Yes, semiconductor sales dropped 15.3% to €53.9 million last quarter. The market sees this as disaster. More discerning investors might notice their customers keep paying deposits anyway. Contract liabilities - essentially customer prepayments - increased 20.7%. People don't usually prepay for things they don't plan to use.

They've also positioned themselves perfectly for the great semiconductor reshoring. While everyone talks about building new chip plants in Europe and America, SGL already operates there. Quote from management: "A huge part of our investments went into our silicon facility in St. Marys, U.S." Geographic arbitrage works both ways - sometimes being a German manufacturer with American operations is exactly what customers want.

The Process Technology division deserves attention too. Most investors fixate on semiconductors, missing this gem hiding in plain sight. The division posted record 26.5% margins selling equipment to chemical companies. That's their "boring" business.

Now, about that balance sheet everyone worries about. Net debt sits at 0.76 times EBITDA. In human language: they could pay off all their debt in about nine months if they wanted to. Their working capital metrics keep improving - Days Sales Outstanding dropped from 62.7 to 55.9 days. They're investing 1.56 times depreciation in new capacity while maintaining these metrics. That's not what distress looks like.

The ownership structure creates interesting dynamics. BMW owns 18.4%, Volkswagen another 7.4%. Your biggest customers owning 25.8% of your company changes conversations about pricing and strategic planning. They're not just shareholders - management notes they're involved in product development. When was the last time you heard about customers buying stakes in their suppliers just to secure access?

Sure, the Carbon Fibres division loses money. The market focuses obsessively on this. It's a bit like fixating on Amazon's physical bookstores while ignoring AWS. The core high-tech materials business keeps humming along, growing wallet share through the downturn: "We even increased the share of wallet due to our strong contract structure."

This brings us to valuation, where things get almost comical. SGL trades at 4.53 times EBITDA. Their peers trade at … well, this is tricky. Let me explain.

SGL Carbon sits in a peculiar spot - it's priced like it competes with Mersen and Morgan in the "we make things out of carbon" business (4-6x EBITDA), while actually being a critical supplier to an industry where companies trade at 15-30x EBITDA.

Looking at some semiconductor equipment multiples:

• ASML: 28.5x EBITDA (but they're ASML, they basically have a monopoly on reality)

• Tokyo Electron: 15.56x EBITDA

• Entegris: 20.18x EBITDA

• Average company: 15.13x EBITDA

Now, SGL isn't ASML. They're not even Tokyo Electron. But here's what they do have:

• 25.3% margins in their semiconductor business

• €116.5M in customer prepayments (customers paying years in advance!)

• BMW and VW as strategic shareholders (because why not have your customers also be your owners)

And they trade at... 4.5x EBITDA. The market has essentially decided that making ultra-precise graphite components for silicon carbide chips is the same as making carbon fibre for bicycles. It's like valuing Apple based on their retail stores while ignoring the iPhone business.

The semiconductor equipment sector trades at these multiples because:

1. High barriers to entry (try qualifying as a new supplier, I'll wait)

2. Critical to customer operations (one bad component = millions in ruined chips)

3. Sticky customer relationships (switching costs are enormous)

SGL has all three in their semiconductor business. Yet they're priced like they sell charcoal for barbecues.

Is SGL worth 15x EBITDA like the pure-play semiconductor equipment makers? Probably not - they do still have that carbon fibre business that loses money with impressive consistency. But 4.5x suggests the market thinks the semiconductor business is worth roughly the same as the carbon fibre business.

You could build a reasonable bull case just on mean reversion - eventually the market will price them closer to peers. But the real opportunity lies in their evolving business mix. As semiconductor manufacturers reshore production and electric vehicle growth recovers, SGL's high-margin products become even more critical. Management isn't waiting around either - they're already expanding into new applications: "Right now, we see, for example, air conditioning units they will be equipped also with SiC chips."

The semiconductor industry runs on precision, patience, and strategic planning measured in years, not quarters. SGL Carbon stands at the intersection of European manufacturing expertise and critical semiconductor technology. The market sees a carbon company with a semiconductor hobby. Reality suggests the opposite.

So what do we make of all this?

At its core, SGL Carbon presents two radically different businesses under one roof. The semiconductor materials division crafts ultra-precise graphite components that chip manufacturers literally cannot make silicon carbide chips without. Their customers pay massive deposits years in advance just to secure supply - that's not something companies do for fun. Meanwhile, their carbon fibre business keeps finding creative new ways to lose money, most recently by betting big on wind energy right before that market collapsed.

For bears, this is a straightforward story: A German industrial company with high energy costs, facing a semiconductor slowdown, carrying a money-losing division, and operating in a country whose manufacturing base faces serious challenges. If you believe manufacturing is leaving Germany and that the semiconductor "reshoring" trend is more political theatre than reality, SGL looks expensive even at these levels.

The bull case rests on two core beliefs: First, that silicon carbide chips (used in electric vehicles and industrial power systems) represent the future of semiconductors. Second, that having qualified local suppliers for critical components matters more than ever in a world of fragile supply chains. If you're right about that, you're looking at a critical semiconductor supplier masked as a carbon company, trading at industrial commodity valuations while generating software-like margins in its core business.

As Warren Buffett once said, "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact." SGL flips this wisdom on its head - they've managed to combine a business so good customers pay years in advance with one so challenging it makes losing money look like an art form.

What keeps running through my mind is the timing. Here we are in early 2025, watching governments throw billions at semiconductor reshoring, electric vehicle adoption hitting an air pocket, and German industry facing an identity crisis. And in walks SGL, somehow simultaneously representing both the old world of European manufacturing and the new reality of critical tech supply chains. They're either perfectly positioned for the next decade of industrial transformation or stuck between two eras, unable to fully commit to either. The market has picked its side of this argument. The question is whether it picked the right one.

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