What happened
Shares of Ferroglobe (GSM +2.35%), a maker of specialty metals, popped in Monday trading and is up 11.3% as of 3:45 p.m. ET.
You can thank investment bank Seaport Global for that.
Image source: Getty Images.
So what
This morning, Seaport initiated coverage of Ferroglobe with a buy rating and a $16 price target that implies Ferroglobe shares could more than double in price over the course of the next 12 months, reported StreetInsider.com.
Silicon prices enjoyed a "spectacular rally" last year, as Capital.com reported in October, on production reductions in China because of power supply cuts. MetalBulletin.com noted the rally as well, pointing out that in seven short weeks, the price of silicon in the U.S. nearly tripled.
And as Seaport explained: "We believe the historic run in silicon and ferroalloys prices will translate to substantial improvement" in 2022 earnings before interest, taxes, depreciation, and amortization (EBITDA) to free cash flow (FCF)
Now what
Logically, that makes sense. Yet even so, investors should beware that Ferroglobe has an extremely "lumpy" record when it comes to free cash flow generation, soaring one year (2020 for example, when FCF was $124 million) only to fall the next (2021, for example, where FCF is negative $40 million year to date), according to data from S&P Global Market Intelligence.
Seaport isn't alone in thinking this trend will reverse in 2022, and consensus estimates are that Ferroglobe could indeed generate a bumper crop of cash -- perhaps as much as $806 million -- this year. Those same analysts who predict cashflow riches in 2022, however, warn that FCF will plunge back down to $330 million in 2023, and fall further to $220 million in 2024.
When investing in cyclical industries like silicon, beware: Just because one step is up doesn't mean the next step down won't be a doozy.
