Graphene investors love GrafTech International Ltd. (GTI.DL).

That is, investors love GrafTech up until they learn that GrafTech doesn't actually make a lot of money off of the new hi-tech, carbon-based supermaterial graphene -- or even hold many patents to the technology for producing it. Rather, GrafTech focuses more on industrial applications for graphite in industries such as chemicals and steelmaking. It's at this point that investors generally lose interest in the stock.

Be that as it may, yesterday GrafTech finally gave investors a second reason to stick around and give its stock a second look: earnings.

What GrafTech said
Reporting its financial results for the first quarter of 2014, GrafTech reported that:

  • Q1 sales hit $281 million, up 11% in comparison to last year's first quarter and comfortably ahead of analyst estimates.
  • It lost $0.08 per diluted share under GAAP accounting, but earned $0.01 in net income "adjusted" to exclude the cost of restructuring charges taken in the quarter. Depending on which number you focus on, the company therefore either missed, or beat analysts' expectation of a $0.02 per share loss.
  • It even eked out a small cash profit for the quarter as well, generating positive free cash flow of $0.4 million. As a result, GrafTech's results for the past 12 months remain cash-positive as well, with free cash flow of $26 million -- despite having GAAP financials that show a $46 million net loss for the past year.

And yet, despite all this (arguably pretty good) news, GrafTech shares slumped in Thursday trading, falling 1.1% on a generally "up" day for global stock markets. Is that fair?

Perhaps not. After all, GrafTech's results show that it's making solid progress in cutting costs even as it grows its flagship industrial materials business, where sales were up 5%. And in the smaller -- and more profitable -- engineered solutions unit, sales galloped ahead a whopping 38% in Q1 as the company enjoyed success in selling new products for use in everything from high temperature furnaces to consumer electronics.

Valuation
Crucially, the company also upped its forecast for cash generation over the course of this year. While free cash flow was down slightly in Q1, in comparison to the year-ago quarter, GrafTech projects that by the time this year is out, it will have generated positive free cash flow on the order of $50 million-$70 million -- about $20 million more than previously estimated.

If that's the way things play out, this would work out to a two-to-three-fold improvement over trailing free cash flow numbers at GrafTech -- and the best cash performance the company has seen in perhaps five years.

Granted, valuation-wise, it would still leave the company trading for about 26 times free cash flow, which is a bit rich for the 18% long-term growth rate that analysts have assigned the stock. But continued improvement in the company's financials, and continued outperformance of analyst estimates such as we saw in Q1 could still make this stock attractive.

Long story short, while the stock's not an obvious buy just yet, it did a whole lot better in Q1 than investors gave it credit for doing yesterday. These shares should probably have moved up on Thursday's earnings news -- not down.