Three Interesting Setups

Now that we are nearly through earnings season, I thought I’d highlight a few ideas on my radar and what makes them potentially interesting investments (or shorts): Graftech (EAF), Blackbaud (BLKB), and Papa John’s (PZZA).

Graftech International (Ticker: EAF)

For background on the company, please refer to my previous write-ups.

Ongoing challenges in the graphite electrode market—from excess Chinese exports of electrodes and steel—have put tremendous downward pressure on graphite electrode prices. China is a low-cost producer of both steel and electrodes. Due to a downturn in its real estate market, the country has an oversupply of both, which it is exporting/dumping.

In 2024, China exported 110.72 million tonnes of steel—a nine-year high and about 22.7% more than in 2023. Monthly exports remained consistently strong, with December 2024 alone seeing 9.73 million tonnes exported, up 25.9% y/y. A total of 75.3 million tonnes of Chinese steel went to Asia (up ~23% y/y), with Southeast Asia leading the growth. China shipped 33.7 million tonnes to Southeast Asia (a ~27% y/y increase), with Vietnam remaining the largest importer, taking approximately 12.63 million tonnes. Other significant Southeast Asian buyers included Thailand (~5.02 million tonnes) and the Philippines (~4.96 million tonnes).

The Middle East (West Asia) also saw a surge, with Chinese steel exports up ~27%, notably to the UAE (~5.36 million tonnes) and Saudi Arabia (~4.65 million tonnes), each growing over 35–40% y/y. Steel end-users can either buy from domestic producers or import and with imports being the cheaper option, demand for domestic steel has declined. As a result, demand for graphite electrodes from companies like HEG, Graftech, and Showa Denko has decreased as China’s internal production meets its own graphite electrode needs. Notably, China does not import graphite electrodes. Additionally, China remains the world’s top exporter of graphite electrodes.

Export volumes have been high but volatile. In 2023, China’s graphite electrode exports totaled about 297,100 tonnes, roughly flat (-0.7%) compared to 2022. Throughout 2024, shipments fluctuated in response to global Electric Arc Furnace (EAF) steel demand. Mid-2024 saw a notable dip—July exports reached just 18,300 tonnes, the lowest monthly volume in four years, reflecting weak overseas demand and trade policy shifts. However, exports rebounded by year-end, with December 2024 exports reaching ~33,200 tonnes, the highest monthly level of the year (about +15% from November).

Preliminary data suggests that China’s total electrode export tonnage for 2024 ended slightly down y/y, as the weak middle of the year was primarily offset by a strong finish. Overall, the trend indicates sluggish growth or a plateau in electrode export volumes, as the global steel industry grappled with lower EAF mill output and some importers built up inventory earlier in the year.

This sets the stage for today. Graftech recently reported challenging results, with spot prices declining 4.9% q/q to $3,900—compared to a breakeven of $4,900. Management prefers to use cash production costs (excluding depreciation), but the minimum capital expenditure is $40 million and must be accounted for.

Management has locked in 60% of volumes for the year, guiding for low double-digit y/y growth, which would put 2025 volumes at approximately 116k mt. In 2024, total volumes were 103.1k mt (13.1k mt of LTAs and 90k mt of spot volume). LTAs have fully rolled off, and all contracts are now at spot prices.

Based on the $3,900/mt price in Q4, current spot pricing is around $3,800. We will learn the price of these contracts once the company reports its Q1 results.

Why the setup is interesting

1. Management has informed customers that they will increase prices by 15% in the second half 2025. It remains to be determined whether this holds. If it does, it is a step in the right direction, indicating pricing has bottomed.

2. For the first time since 2021, management purchased stock. While not surprising, all previous purchases have been disastrous. It is significant to see Tim Flanagan (CEO) make a purchase.

3. HEG, a competitor of Graftech, has accumulated 21.175 million EAF shares, representing 8.2% of the outstanding shares at an average price of approximately $1.40. Recently, they announced an increase in their authorization from 250 to 350 crores. EAF’s shares have been quite volatile lately, with 19.6 million shares trading on February 12 and 18.5 million on February 21. It is unclear who purchased all the shares on February 12, as no filings have been reported (depending on the ownership stake, we may find out in early March). If HEG was the buyer on February 21, they are required to file Form 4. Should EAF’s price remain low, HEG is likely to bid for the company. HEG CEO Manish Gulati has praised Seadrift and its vertical integration with the key raw material, needle coke.

a. Addendum - Marathon Asset management turns out to be the large buyer, acquiring 14.2m shares equating to 5.5% of S/O

4. Recent tariffs and duties placed on Chinese imports:

a. The EU has targeted tin-coated flat-rolled steel (tinplate) from China, which is primarily used for food cans and other packaging. In January 2025, the European Commission imposed provisional anti-dumping duties on these imports.

b. Heavy steel plates from China (hot-rolled steel plates) used in shipbuilding and construction are now subject to new tariffs in South Korea. In February 2025, South Korea’s Trade Ministry announced a provisional anti-dumping duty on Chinese steel plate imports following a dumping investigation.

c. In April 2024, the Japanese government initiated an anti-dumping investigation into Chinese graphite electrode imports. While no duty has been finalized as of early 2025 (the investigation is ongoing), this move is expected to result in tariffs if dumping is confirmed.

d. United States - Trump signed executive orders restoring the 25% steel tariff rate he implemented in 2018 under Section 232 and raising the previously enacted 10% rate on aluminum to 25%. These tariffs will take effect on March 12th.

e. Vietnam will impose a temporary anti-dumping levy of up to 27.83% on certain steel products from China. The tariff on hot-rolled steel products is expected to take effect on March 7 and will remain in place for 120 days, as stated in the document dated February 21.

5. The Russia-Ukraine war potentially ending. The decline in Europe’s economy is partly due to higher energy costs from the Russia-Ukraine war. While the timing of a peace resolution remains uncertain, the likelihood of a deal appears more significant today than it did months ago. While Europeans may harbor considerable disdain for the damage caused by Russia, I suspect they will welcome lower energy costs, as 40% of the EU's natural gas consumption came from Russia. Reduced energy costs, along with the necessity to rebuild a country, will have a positive effect on the industrial sector of Europe’s economy.

Summary - New tariffs are anticipated to positively impact the demand for graphite electrodes. Countries implementing new tariffs will experience increased demand for domestically produced steel, which Graftech and other electrode manufacturers supply. In addition to raising prices, higher capacity utilization will reduce production costs.

Risks

1. Recent steel tariffs introduce uncertainty that can delay purchasing decisions. This confusion primarily stems from the ambiguity surrounding these policies' implementation and future adjustments. As businesses struggle to predict costs and navigate the new tariffs, this uncertainty may decrease demand, as firms may postpone or reduce their purchasing activities until more explicit guidelines are established.

2. The US has been the strongest economy post covid and is where electrodes sell at the highest price. A downturn in the US economy, which I believe is increasing in probability from DOGE actions, a pullback on government spending, and immigration changes, results in weaker demand for Graftech’s electrodes.

Blackbaud (Ticker: BLKB)

Blackbaud is an intriguing setup because, aside from two very important factors (detailed later), the stock is short. In 2022, Blackbaud acquired Everfi, a SaaS platform powering corporate ESG and Corporate Social Responsibility (CSR) initiatives. EverFi is an educational technology company that provides online learning platforms primarily focused on critical skills often underrepresented in traditional educational curriculums. These skills include financial literacy, digital citizenship, STEM, career readiness, and health and wellness. Schools, universities, and businesses use their platforms to enhance learning through interactive, technology-driven experiences. The rationale for the $750 million acquisition was that it doubled Blackbaud’s total addressable market to over $20 billion and presented substantial cross-selling opportunities with Blackbaud’s YourCause. The transaction was immediately accretive (perhaps for one quarter). At the time of the acquisition, Everfi was expected to generate revenue of $120 million in 2022, representing approximately 20% y/y growth. In 2024, Everfi generated $86 million in revenue, a 28% decline since the acquisition. The acquisition was an absolute disaster, culminating in Blackbaud disposing of the asset in Q4 2024 for a “nominal amount." $750 million of shareholder value was destroyed in just two years on a market cap of about $3 billion.

Mike Gianoni has been the CEO of Blackbaud since 2014. Under his leadership, the stock has underperformed the S&P 500 by 200% and the Nasdaq by 467%.

2025 revenue guidance of $1.12B represents -3% y/y. However, accounting for the Everfi disposition, $1.12B represents revenue growth of 4.5% y/y. Following a security incident in 2020, elevated security costs, lawsuits, and distractions have vastly diminished. 2025 signifies a new beginning. With minimal security costs and the Everfi drag eliminated, management can concentrate on operating their core donation software business.

No excuses means that the underlying business will now shine through. Blackbaud introduced a new pricing strategy in 2023. Previously, the company operated under one-year or flat multi-year contracts but has now transitioned to three-year contracts with annual escalators.

Let's discuss some accounting nuances that may not present the best picture. Accounting rules require Blackbaud to recognize these new three-year contracts ratably over the contract's duration despite yearly escalators. For instance, a three-year, $1 million contract transitioning from a one-year, $268,000 contract would see Blackbaud recognize $333,000 in revenue each year, compared to the actual contract structure of approximately $311,000 in year one, $333,000 in year two, and $356,000 in year three. 2026 will mark the first year that cohort one renews their three-year contracts. Blackbaud implemented aggressive pricing changes during this initial contract transition, with year one price increasing ~16% y/y and years two to three rising by 7% per annum. They will unlikely be able to implement such aggressive pricing again, presenting a further headwind to growth.

Short Thesis Is Simple

1. Year 1 had the most significant revenue uplift, and given the unlikelihood of increasing prices at the same rate as before (with Year 1 showing a 16% uplift followed by approximately 7% in years 2-3), growth has likely peaked. Consequently, deferred revenue growth has also probably plateaued as they adjust pricing to a lower rate. Coupled with Gross Retention Revenue ranging from 92% to 94%, Net Retention is at or below 100%, indicating that growth must come from new customers. Total donations reached approximately $500 billion in 2022 and rose to $557 billion in 2023 (a 10% y/y increase), totaling $557 billion in 2024. The rise of Donor-Advised Funds poses negative implications since funds or securities donated from these portfolios are unlikely to utilize Blackbaud’s payment system.

2. The stock buybacks appear to be a charade: “We plan to continue to be purposeful about buying back our stock in 2025, anticipating a buyback of 3% to 5% of our total outstanding shares as we aim to fulfill Blackbaud’s compelling investment thesis.” The Q4 weighted average shares outstanding were 49.1 million. In their 2025 guidance, “Fully diluted shares for the year are expected to be approximately 48.5 million to 49.5 million.” In other words, buybacks are set to eliminate dilution, making them insignificant. Analyzing the company on a GAAP EPS basis, I estimate they will generate around $1.20, potentially reaching $1.40 in 2027, compared to significantly higher sell-side estimates, leading to downward estimate revisions.

3. No valuation support - High valuation, slowing growth, and downward estimate revisions offer no support. At $66, the stock trades at approximately 50 times my 2027 earnings estimate. Management should allocate cash flow towards debt repayment, as they cannot write off the full interest expense against their EBIT for tax purposes. In 2025, I estimate that EBIT will be around $100 million, and the guided interest expense was $68 million. Since companies are limited to 30% of EBIT for interest deductions, the additional $38 million will not provide any tax savings. Paying off debt does not increase tax liability and results in lower interest expenses.

Risks & Why this may not be an “obvious” short

In April 2024, Clearlake Capital offered to buy Blackbaud for $80 per share, a 4% premium over the previous day's closing price of $76.72. The board rejected the offer one month later. Clearlake owns approximately 18% of BLKB. There will always be a possibility that Clearlake will make another offer for the company. Given that the stock is now in the mid-$60s compared to the mid-$70s, depending on their assessment of the business value—which should be lower—this likely increases the chances of them pursuing an acquisition.

Of course, there’s the opposite scenario where management and the board’s reluctance to accept the $80 offer, coupled with business deterioration, might lead Clearlake to reduce its stake. In this case, that embedded takeout premium would vanish while an 18% owner sells, eliminating any potential takeout optionality. I believe this is the more probable outcome.

Thus, the catalyst path is clear: negative earnings revisions alongside a significant shareholder divesting their stake. Chairman Andrew Leitch has been in his position since 2009 and has overseen a 15-year run of poor performance.

I don’t foresee a scenario in which they would accept a lower bid than the one previously offered, even though the value is lower today than a year ago.

Papa Johns (Ticker: PZZA)

While getting up to speed on Papa John’s story, a report broke on 2/13 that Irth Capital management is in discussions to purchase Papa John’s (PZZA) for $1.4B or $43/share. This caused shares to rise 18% that day. The risk-reward dynamics were much different at $35 compared to $50, so I put the idea on hold. That changed on 2/20 when director Anthony Sanfilippo stepped down. Interestingly, in the filed 8-K, the typical phrase—"The director did not step down due to any disagreement with the company"—was missing. Logically, if Papa John’s were going to be acquired, one would likely remain on the board until the transaction closed, earning board fees, stock compensation vesting, and benefiting from the price increase between now and the closing. Assuming a cash-only closing, which the reports discussed, and an acquisition by a non-strategic buyer reduces regulatory concerns, stepping down from the board makes little sense unless it’s for family or health reasons, which were not mentioned in the notice. This leads me to believe one of two things is happening: either this board member wanted to sell the business, and the others did not, or there was no offer to buy Papa John’s presented (or the price was unreasonable), resulting in a low probability of a transaction occurring. If these two scenarios are directionally correct, the stock's rise from $35 to $50, and subsequently back to the mid-$45 range, is likely headed lower once it becomes public knowledge that the deal is unlikely to happen. The stock will decline on this news as shareholders involved in the arbitrage game will sell their positions.

On the day the company or news outlets report that a sale is unlikely, I would consider buying the stock, which will likely be in the mid to high $30s. Rationale for a potential buy: First, in August 2024, Todd Penegor was appointed CEO. His previous tenure at Wendy’s went ok, with the stock increasing 111% during his time there excluding the dividend. He came out of retirement for this position, suggesting he sees an opportunity. Second, same-store sales (SSS) comps are expected to improve in the second half of 2025, setting up a positive narrative. EPS is anticipated to decline 21% y/y in 2025; however, it is projected to increase by 34% in 2026, setting up an accelerating fundamentals catalyst. Combined with an undemanding valuation, especially in the context of a “deal break,” the stock trading at 13.6x 2027 estimated EPS at today’s price and 11.5x at a $38 deal break price presents a compelling risk-reward scenario. Third, we’ve seen pizza turnaround stories before and know it’s possible (Domino’s Pizza – DPZ). Fourth, early due diligence and management’s commentary suggest several low-hanging fruit initiatives that could drive improvements. The app is outdated, the pizza-making process is labor-intensive, and small capex projects could reduce employee costs. Ensuring the website functions properly is a simple but crucial component, and I found a bug on my first order that could lead to order errors. Management’s focus on driving down costs to open stores enhances franchisee ROI, increasing demand for future locations. With a primarily franchised business, this capital-light model can compound at high rates of return if management executes properly, stemming from excess free cash flow that can be directed toward buybacks at an attractive valuation.