Research from Water Tower Research, Water Tower Research

Water Tower Research

Water Tower Research is a leading equity research firm that provides research on micro, small and mid cap companies.

Water Tower Research was founded by Wall Street veterans after witnessing a fundamental shift in the investment research industry with the result being a declining knowledge base among investors, a lack of awareness and a shrinking pool of fundamental research being conducted on companies across the small-cap and micro-cap spectrum. The same issues are now increasingly occurring in the mid-cap space. This sea change within the investment community is impacting not only the companies themselves but also current shareholders and potential investors. With significantly less active sell-side sponsorship by Wall Street, a substantial information gap has developed between companies and various constituents in the financial community. The net result is fewer channels for insight and information to flow between companies and investors.

Research from Water Tower Research

Equity Research Firm

Thematic (Sector/Industry)

Multiple Countries / Thematic (Sector/Industry)

<h2>KEY HIGHLIGHTS</h2>
<div></div>
<ul>
<li>WTR-CMI last week.&nbsp;The market continued to correct, with both the S&amp;P 500 and Russell 2000 declining 2.4% and 2.5%, respectively. Our WTR-CMI index of 30 chemicals and materials technology stocks didn’t quite keep up the pace, losing 2.6% over the course of last week.</li>
<li>Winners and losers.&nbsp;Possibly driven by the prospects of boardroom actions, AVD led our index last week with a 4.1% gain. Overall, only eight of our 30 stocks saw their value increase last week. The declines were led by PLL, which lost 15.5%, along with other lithium stocks in our index, including ALB, LTHM, and LAC (down 5.6%, 5.9%, and 7.0%, respectively), which are beginning to trade like energy stocks in response to announced increases in Saudi Arabian oil production.</li>
<li>Patent fights and boardroom machinations (cont.).&nbsp;FMC continues its legal battles with unlicensed manufacturers of its leading insecticide active ingredient and announced that the Ningbo Intermediate People’s Court in Zhejiang Province, China,&nbsp;granted the company a pre-suit preliminary injunction&nbsp;restraining Zhejiang Yongtai Technology Co. Ltd. from infringing on the chlorantraniliprole (Rynaxypyr®) patent. Meanwhile, Cruiser Capital Advisors responded to the AVD board’s letter to the shareholders with one of its own, accompanied by a&nbsp;presentation filed with the SEC&nbsp;that advocates its position.</li>
<li>String of auto sales declines continued in April.&nbsp;If April new car registration declines in the US, UK, and France were bad, China’s COVID lockdown policies contributed to an even steeper&nbsp;48% drop in Y/Y registrations&nbsp;to the lowest April level in 10 years. The consequences of the invasion of Ukraine and the sanctions that followed were evident in&nbsp;Russia’s 79% Y/Y plunge&nbsp;in new car registrations last month. Even&nbsp;Germany&nbsp;wasn’t spared, with April registrations down 22% Y/Y.</li>
<li>Not quite ready for primetime?&nbsp;Stellantis CEO Carlos Tavares recently spoke at an industry event and&nbsp;expressed apprehension&nbsp;over the rapid growth of EV production, often driven by political considerations, without addressing the other parts of the EV infrastructure, such as charging, mining, and energy grids, which may give rise to problems of their own, suggesting more thought should be given to the execution of the EV transition.</li>
</ul>
<h2>WTR-CMI WEEKLY PERFORMANCE</h2>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/275/517/original/image_84217254721653010732172.png?1653010735" class="editor-image img-responsive" data-smartkarma-image-id="275517"></figure>
<p>Source: YCharts; May 13 close</p>
<h2>Automotive &amp; Transportation</h2>
<p>Bad April results may not be the last.&nbsp;As major auto producing countries finish reporting their April new car sales results, early indications are that May may not show much of an improvement, even as Y/Y comps get slightly easier. Recently,&nbsp;Toyota announced temporary idling&nbsp;of several lines across its plants in Japan, citing COVID lockdowns and supply chain disruptions. The company lowered its production target for the month by approximately 7%. While some supply chain issues are getting resolved, particularly when it comes to European manufacturers, with wire harness producer&nbsp;Leoni getting back close to pre-war levels, semiconductor chip shortages continue to buffet the industry as well, with&nbsp;another 75,300 vehicles axed&nbsp;from global production estimates by AutoForecast Solutions. Consequently, we remain concerned over the performance of PPG, AXTA, FUL, AVNT, and other companies in our sector with significant exposure to the automotive and transportation industry, as weaker end customer volumes may not be fully offset by higher prices, especially now that the US dollar has rallied to multi-year highs against foreign currencies, adding FX risk to earnings and sales forecasts.</p>
<h2>Lithium &amp; EV Ecosystem</h2>
<p>China’s NEV growth hits a snag in April.&nbsp;While April NEV sales in the country were up 50% Y/Y, they&nbsp;were down more than 38% versus March&nbsp;and were the lowest monthly sales so far this year, even when compared with February, which was affected by Chinese Lunar New Year events. The unwinding of COVID lockdowns may allow the Y/Y growth pace to pick up again in May, but we may have to wait until June for the industry to return to high double-digit or<br>triple-digit Y/Y growth of NEVs, especially as vehicle prices are going up due to rapidly rising battery metal and other raw material costs.</p>
<p>Expanding European EV ecosystem.&nbsp;Privately held Green Lithium, a lithium processing company, has published plans to build the&nbsp;UK’s first lithium refinery&nbsp;in northern England. Construction is expected to begin in2023, with production targeted to start in 2024. Full production capacity of 50,000 mt of battery-grade lithium products is expected to be reached in 2026 and is intended to supply the European EV and battery market. Meanwhile, a year after buying land in Germany for the construction of a battery grade-lithium hydroxide processing plant, AMG Lithium GmbH, a subsidiary of the Dutch Advanced Metallurgical Group (AMG),&nbsp;started construction&nbsp;of its lithium hydroxide plant in Bitterfeld-Wolfen<br>(Saxony-Anhalt), with production expected in the fall of 2023 and initial annual production capacity of 20,000 mt, enough to supply 800,000 electric cars. The plant will be capable of expanding production to 100,000 mt over time, as demand warrants.</p>
<p>Rising costs drive consternation and innovation.&nbsp;We previously highlighted Stellantis CEO Carlos Tavares’ concerns over the hurdles the EV industry must clear in the near to mid-term; a somewhat more optimistic view was provided by a&nbsp;recent report analyzing the EV market&nbsp;published by Transportation &amp; Environment, which suggests we have sufficient critical metals infrastructure to meet the expected demand from the EV market at least through the next two to four years, by which time a slew of new mining, refining, converting, and battery production capacity is expected to be brought online. A more&nbsp;granular look at the various metals&nbsp;that go into EV batteries was provided by Davis Index, which highlighted recent geopolitical issues, including the war in Ukraine, and offered a less optimistic view, more in line with that of Mr. Tavares. Regardless of forecasts and assumptions around EV growth and possible projected raw material shortfalls, one thing is certain now: metal prices have skyrocketed over the last two years, which is driving technology decisions today, and may have implications for the long term. Thus,&nbsp;BMW is working to switch to a newer and cheaper battery cell technology&nbsp;that may allow it to cut its battery costs by 30%, while improving energy density of battery packs by at least low double-digit percent versus batteries currently used by Tesla. With higher lithium prices&nbsp;reducing the premium&nbsp;of nickel-cobalt-manganese, or NCM, batteries versus lithium-iron-phosphate, or LFP batteries, auto manufacturers may begin to reconsider sacrificing the performance of NCM packs in favor of lower priced LFP technology for entry level and bargain priced EVs. Meanwhile, research continues on&nbsp;commercializing sodium-ion batteries&nbsp;as an alternative to current lithium-ion technologies, given the obvious price and availability advantages of sodium versus lithium.</p>
<h2>Ag-Chem and Ag-Tech</h2>
<p>Weather takes center stage as US plantings fall behind schedule.&nbsp;The latest USDA report shows that&nbsp;plantings are off to their worst start in nine years, with only 22% the crop planted, which is 28% below the five-year average for this time of year. The news isn’t much better in soybeans, with plantings at 12% being half that of the five-year average. Not surprising,&nbsp;the USDA recently lowered its yield projections for corn, although the soybean outlook still remains robust, with higher planted acres still expected. Historically, it’s been difficult, if not impossible, to catch up with plantings after such a slow start, but even&nbsp;late plantings have a chance to produce higher-than-expected yields. However, record yields still used by the USDA in its projections for corn may not be achievable, suggesting another cut in USDA expectations may be coming. Globally, despite ongoing war,&nbsp;Ukrainian farmers are doing what they can&nbsp;to get their crop into the ground to help avert food shortages at home and have an opportunity to export to countries dependent on Ukraine for crops. Meanwhile, the country awaits the opportunity to export the wheat from its last harvest, which is currently being blocked by Russian blockades of Ukrainian ports.</p>
<h2>Recent WTR Publications</h2>
<p>Bio-ag market update and Marrone Bio Innovations-Bioceres Merger</p>
<p>Marrone Bio Innovations 1Q22 Results</p>
<p>Fireside Chat with Marrone Bio Innovations CEO – Kevin Helash</p>
<h2>Rating and Price Target Changes</h2>
<p>ALB –&nbsp;KeyBank raised its price target (PT) to $125 from $198 and reiterated its Underweight recommendation; JP Morgan raised its PT to $235 from $200 and maintained its Neutral rating; Morgan Stanley raised its PT to $135 from $80 and reiterated its Underweight rating; RBC raised its PT to $300 from $276 and reiterated its Outperform rating; Wells Fargo upgraded the stock to Overweight from Equal Weight and raised its PT to $285 from $215.</p>
<p>CTVA –&nbsp;Deutsche Bank raised its PT to $64 from $56 and reiterated its Buy recommendation.</p>
<p>EAF –&nbsp;RBC lowered its PT to $10 from $12 but reiterated its Buy recommendation.</p>
<p>NGVT –&nbsp;Wells Fargo raised its PT to $74 from $70 and maintained its Equal Weight recommendation.</p>
<p>VVV –&nbsp;CFRA lowered its PT to $34 from $40 and reiterated its Buy rating; Citigroup also lowered its PT to $35 from $40 and reiterated its Buy recommendation; JP Morgan upgraded the stock to Overweight from Neutral and established a $36 PT.</p>
<h2>DISCLOSURES</h2>
<div></div>
<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>Dmitry Silversteyn, who is the writer of this report, covers the Chemicals &amp; Materials Technology and BioEconomy sectors for WTR. Mr. Silversteyn and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.</p>

KEY HIGHLIGHTS


WTR-CMI last week.&nbsp;The market continued to correct, with both the S&amp;P 500 and Russell 2000 declining 2.4% and 2.5%, respectively. Our WTR-CMI index of 30 chemicals and materials technology stocks didn’t quite keep up the pace, losing 2.6% over the course of last week.
Winners and losers.&nbsp;Possibly driven by the prospects of boardroom actions, AVD led our index last week with a 4.1% gain. Overall, only eight of our 30 stocks saw their value increase last week. The declines were led by PLL, which lost 15.5%, along with other lithium stocks in our index, including ALB, LTHM, and LAC (down 5.6%, 5.9%, and 7.0%, respectively), which are beginning to trade like energy stocks in response to announced increases in Saudi Arabian oil production.
Patent fights and boardroom machinations (cont.).&nbsp;FMC continues its legal battles with unlicensed manufacturers of its leading insecticide active ingredient and announced that the Ningbo Intermediate People’s Court in Zhejiang Province, China,&nbsp;granted the company a pre-suit preliminary injunction&nbsp;restraining Zhejiang Yongtai Technology Co. Ltd. from infringing on the chlorantraniliprole (Rynaxypyr®) patent. Meanwhile, Cruiser Capital Advisors responded to the AVD board’s letter to the shareholders with one of its own, accompanied by a&nbsp;presentation filed with the SEC&nbsp;that advocates its position.
String of auto sales declines continued in April.&nbsp;If April new car registration declines in the US, UK, and France were bad, China’s COVID lockdown policies contributed to an even steeper&nbsp;48% drop in Y/Y registrations&nbsp;to the lowest April level in 10 years. The consequences of the invasion of Ukraine and the sanctions that followed were evident in&nbsp;Russia’s 79% Y/Y plunge&nbsp;in new car registrations last month. Even&nbsp;Germany&nbsp;wasn’t spared, with April registrations down 22% Y/Y.
Not quite ready for primetime?&nbsp;Stellantis CEO Carlos Tavares recently spoke at an industry event and&nbsp;expressed apprehension&nbsp;over the rapid growth of EV production, often driven by political considerations, without addressing the other parts of the EV infrastructure, such as charging, mining, and energy grids, which may give rise to problems of their own, suggesting more thought should be given to the execution of the EV transition.

WTR-CMI WEEKLY PERFORMANCE

Source: YCharts; May 13 close
Automotive &amp; Transportation
Bad April results may not be the last.&nbsp;As major auto producing countries finish reporting their April new car sales results, early indications are that May may not show much of an improvement, even as Y/Y comps get slightly easier. Recently,&nbsp;Toyota announced temporary idling&nbsp;of several lines across its plants in Japan, citing COVID lockdowns and supply chain disruptions. The company lowered its production target for the month by approximately 7%. While some supply chain issues are getting resolved, particularly when it comes to European manufacturers, with wire harness producer&nbsp;Leoni getting back close to pre-war levels, semiconductor chip shortages continue to buffet the industry as well, with&nbsp;another 75,300 vehicles axed&nbsp;from global production estimates by AutoForecast Solutions. Consequently, we remain concerned over the performance of PPG, AXTA, FUL, AVNT, and other companies in our sector with significant exposure to the automotive and transportation industry, as weaker end customer volumes may not be fully offset by higher prices, especially now that the US dollar has rallied to multi-year highs against foreign currencies, adding FX risk to earnings and sales forecasts.
Lithium &amp; EV Ecosystem
China’s NEV growth hits a snag in April.&nbsp;While April NEV sales in the country were up 50% Y/Y, they&nbsp;were down more than 38% versus March&nbsp;and were the lowest monthly sales so far this year, even when compared with February, which was affected by Chinese Lunar New Year events. The unwinding of COVID lockdowns may allow the Y/Y growth pace to pick up again in May, but we may have to wait until June for the industry to return to high double-digit or triple-digit Y/Y growth of NEVs, especially as vehicle prices are going up due to rapidly rising battery metal and other raw material costs.
Expanding European EV ecosystem.&nbsp;Privately held Green Lithium, a lithium processing company, has published plans to build the&nbsp;UK’s first lithium refinery&nbsp;in northern England. Construction is expected to begin in2023, with production targeted to start in 2024. Full production capacity of 50,000 mt of battery-grade lithium products is expected to be reached in 2026 and is intended to supply the European EV and battery market. Meanwhile, a year after buying land in Germany for the construction of a battery grade-lithium hydroxide processing plant, AMG Lithium GmbH, a subsidiary of the Dutch Advanced Metallurgical Group (AMG),&nbsp;started construction&nbsp;of its lithium hydroxide plant in Bitterfeld-Wolfen (Saxony-Anhalt), with production expected in the fall of 2023 and initial annual production capacity of 20,000 mt, enough to supply 800,000 electric cars. The plant will be capable of expanding production to 100,000 mt over time, as demand warrants.
Rising costs drive consternation and innovation.&nbsp;We previously highlighted Stellantis CEO Carlos Tavares’ concerns over the hurdles the EV industry must clear in the near to mid-term; a somewhat more optimistic view was provided by a&nbsp;recent report analyzing the EV market&nbsp;published by Transportation &amp; Environment, which suggests we have sufficient critical metals infrastructure to meet the expected demand from the EV market at least through the next two to four years, by which time a slew of new mining, refining, converting, and battery production capacity is expected to be brought online. A more&nbsp;granular look at the various metals&nbsp;that go into EV batteries was provided by Davis Index, which highlighted recent geopolitical issues, including the war in Ukraine, and offered a less optimistic view, more in line with that of Mr. Tavares. Regardless of forecasts and assumptions around EV growth and possible projected raw material shortfalls, one thing is certain now: metal prices have skyrocketed over the last two years, which is driving technology decisions today, and may have implications for the long term. Thus,&nbsp;BMW is working to switch to a newer and cheaper battery cell technology&nbsp;that may allow it to cut its battery costs by 30%, while improving energy density of battery packs by at least low double-digit percent versus batteries currently used by Tesla. With higher lithium prices&nbsp;reducing the premium&nbsp;of nickel-cobalt-manganese, or NCM, batteries versus lithium-iron-phosphate, or LFP batteries, auto manufacturers may begin to reconsider sacrificing the performance of NCM packs in favor of lower priced LFP technology for entry level and bargain priced EVs. Meanwhile, research continues on&nbsp;commercializing sodium-ion batteries&nbsp;as an alternative to current lithium-ion technologies, given the obvious price and availability advantages of sodium versus lithium.
Ag-Chem and Ag-Tech
Weather takes center stage as US plantings fall behind schedule.&nbsp;The latest USDA report shows that&nbsp;plantings are off to their worst start in nine years, with only 22% the crop planted, which is 28% below the five-year average for this time of year. The news isn’t much better in soybeans, with plantings at 12% being half that of the five-year average. Not surprising,&nbsp;the USDA recently lowered its yield projections for corn, although the soybean outlook still remains robust, with higher planted acres still expected. Historically, it’s been difficult, if not impossible, to catch up with plantings after such a slow start, but even&nbsp;late plantings have a chance to produce higher-than-expected yields. However, record yields still used by the USDA in its projections for corn may not be achievable, suggesting another cut in USDA expectations may be coming. Globally, despite ongoing war,&nbsp;Ukrainian farmers are doing what they can&nbsp;to get their crop into the ground to help avert food shortages at home and have an opportunity to export to countries dependent on Ukraine for crops. Meanwhile, the country awaits the opportunity to export the wheat from its last harvest, which is currently being blocked by Russian blockades of Ukrainian ports.
Recent WTR Publications
Bio-ag market update and Marrone Bio Innovations-Bioceres Merger
Marrone Bio Innovations 1Q22 Results
Fireside Chat with Marrone Bio Innovations CEO – Kevin Helash
Rating and Price Target Changes
ALB –&nbsp;KeyBank raised its price target (PT) to $125 from $198 and reiterated its Underweight recommendation; JP Morgan raised its PT to $235 from $200 and maintained its Neutral rating; Morgan Stanley raised its PT to $135 from $80 and reiterated its Underweight rating; RBC raised its PT to $300 from $276 and reiterated its Outperform rating; Wells Fargo upgraded the stock to Overweight from Equal Weight and raised its PT to $285 from $215.
CTVA –&nbsp;Deutsche Bank raised its PT to $64 from $56 and reiterated its Buy recommendation.
EAF –&nbsp;RBC lowered its PT to $10 from $12 but reiterated its Buy recommendation.
NGVT –&nbsp;Wells Fargo raised its PT to $74 from $70 and maintained its Equal Weight recommendation.
VVV –&nbsp;CFRA lowered its PT to $34 from $40 and reiterated its Buy rating; Citigroup also lowered its PT to $35 from $40 and reiterated its Buy recommendation; JP Morgan upgraded the stock to Overweight from Neutral and established a $36 PT.
DISCLOSURES

Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.  WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.  Dmitry Silversteyn, who is the writer of this report, covers the Chemicals &amp; Materials Technology and BioEconomy sectors for WTR. Mr. Silversteyn and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.  Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.  In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.  The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.  The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.  All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.

Mat-Chem Notes for the Week Ended May 15, 2022