Sold off 10% with the market on no company news. Now the market is rebounding. This one stays flat. Not only is it not participating in broad rebound, it is also lagging its peers and even tries to slide further down.
Yet, mgmt recently reconfirmed guidance and the investment thesis is nicely intact: political year, auto ads strong, CF accretive acquisitions. Sell-side TP is $15.
What is going on? Is it just that the current sentiment against leverage (although very manageable)??
"...Price target $58 (10X CY13E EBITDA, 16X CY13E Adjusted EPS). Our target valuation is in-line
with other filtration companies and below the mid-point of a 9X-13X EBITDA range and 15X-21X
EPS range typically afforded the filtration group. We believe PPO retains a unique opportunity
(scarcity value) to capitalize on the planned growth and penetration of EDVs and mobile power in
the long term and its forecasted growth exceeds other filtration companies but the risks associated
with the aggressive forecast ramp in PPO capacity and a very dynamic competitive industry
environment is discounted in our target multiple..."
"...We reiterate our OUTPERFORM rating and are lowering our price target to
$45 from $58. Our target reflects a 15x multiple 2013E EPS (previously 20x price
to earnings multiple on 2012E), with a mid-teens multiple for the growthy
characteristics of the Lithium business. Shares of PPO are trading at 15.5x and
12.9x our 2012 and 2013 EPS estimates. We would be buyers at current levels.."
It is the absolute info vacuum that is killing the stock. They pulled the guidance completely prior to ER. Very little info on how much they will produce and what exactly is causing the ramp-up slowdown. All analysts' targets are total guesstimates at this point (as they themselves readily admit). Plus huge short in place.
One can make a case for $3 and for $20 at the same time. The only consolation is that $5.8 is closer to $3 than $20.
Any clear and more or less positive guidance (or even plain description of issues and how they will tackle them) will move the stock big.
Another thing is that they are trying to arrange an additional equity raise (PIPE). So there is a threat of dilution. However, it may actually be positive since unlikely they will be raising at these low levels and perhaps closer to $10 (where the stock was when they announced the raise)
PPO. Q4Rev 191 Q4EPS 0.58 Q1EPS outlook lower than Q4
Stifel Nicolaus (tgt $58) Q4Rev 193.8 Q4EPS 0.54 Q1EPS 0.63
Wedbush (tgt $58) Q4Rev 200.4 Q4EPS 0.65 Q1EPS 0.69
Baird (tgt $58) Q4Rev 196.8 Q4EPS 0.60 Q1EPS N/A
Wunderlich (tgt $30) Q4Rev 188 Q4EPS 0.46 Q1EPS 0.46
This is a great summary and I have read most of this. Yet, what makes me scratch my head is a high-volume continuous move down day by day that is taking the stock to below $40 levels (would be less concerned if it was $42-43 level now). Despite all this research somebody must have a strong conviction to the contrary. Otherwise it would not be going through the last resistance level at $41 or so (too ballsy)
Strange action. Last it went (and stayed) below $40 was on the day of LG news, plus it was a major drop on the day, drawing massive short sell. Next day it was nicely above $41 when analysts weighed in saying sell-off overdone. Then, mgmt did an OK call pretty much saying that LG is a non-issue and confirming investment thesis and stock almost rebounded with most sell-side price targets at $55+ (of course, there are a couple buy-side strong sells)
Now we see a multi-day drop taking it to below $40.
But, fundamentally, not much changed from $50+ down to $40 (well, maybe losing some rev. from LG). And that is a 20% fall!!
There may be some technical arguments around options expiration on Fri etc. But seems that this is a risky game to play for shorts (taking it to a high-momentum day lows) into earnings unless they already bet that earnings will be off. And earnings will have to be off significantly to justify going below $40 (even missed Q4 won't do it, it'd have to be bad outlook, and nothing is pointing to that).
All that said, the stock does not seem to be finding new high-conviction buyers to step in at this levels.
Seems either or a combination of the following--a) there are serious concerns about valuation in general that underlie all this (seemingly technical) volatility, b) some insider (or those with insider info) selling into earnings, c) shorts not being prudent.
Either way, not a clear-cut story
Weak on specifics. Same old overall thesis--growing and highly technical market with entry barriers and we are the leaders--but this was known. Key question is if they can continue and accelerate 2011 growth now and not in 2013 or later. His tone suggests yes but few hard facts.
8% overall market growth rate does not cut it for 22 P/E. $400 mln. extra rev (2013?) he mentioned is actually good (on top of current 600). That does imply growth consistent with high P/E
Also good that LG seems to be a total non-issue but the sell-off was driven more by overall valuation concerns and LG news was just a trigger
Guess need to wait for the earnings call to be more comfortable with the thesis
Trades at below 6X 2011 EBITDA. 75% revenue is international projected to grow 7-10% (excl. FX impact). US is flat but that is only 25% of business. Plus they seem to be aggressively cost cutting in the US. So current forward 2012 EBITDA multiple is at about 5.7X or so. Comps trade at 6.5-7X
Seems that fair value is over 15% up from here. Minus stock dilution from pension funding with new equity (3%) minus FX = +10% from current levels seems easily justified
After speaking with Polypore's management, we believe today's price reaction was over done and that LG Chem's announcement was not unexpected. There remain many important questions to pose for LGChem, including what process (wet or dry) will they use for this capacity, will these separators be for consumer electronics or automotive, what is the time horizon for this capacity to be qualified and sold, and most importantly how successful will LGChem be, given the history of new entrants such as MMM, Dow Chemical,DuPont, Mitsubishi, etc. failing to penetrate a niche market. Polypore continues to be very confident that their process intellectual property is very difficult to replicate. Furthermore, the design in process for the 50 separate vehicle programs with >20 different auto OEMs typically takes 3-5 years. Polypore has received permission from its board to expand capacity, based on reasonable pricing, volumes, and general contract terms, and none of these terms have changed with today's news from LG Chem. We do not doubt that a couple of new entrants will
over the longer term succeed in penetrating a separator market expected to grow rapidly on EV demand, but at this point do not see significant negative pricing/margin implications over the next couple of years from today's development.
We continue to believe that new competition for Polypore is inevitable in a rapidly growing market, but continue to believe that the company enjoys a handy lead. While our initial reaction was that possibly LG Chem had caught up sooner than expected, our conversation with management helped alleviate these fears. Longer-term, global battery manufacturers will be continuously researching strategies to reduce battery costs; this is a given and required to achieve the reduction in prices for PHEVs and EVs to gain significant commercial adoption without subsidies. While we continue to believe most of the R&D by battery manufacturers will be focused on the electrode, LG Chem's attempt to vertically integrate does imply that the separator is also "fair game". The question is will anyone be successful (we think eventually, yes) and what is the time-frame for new entrants to gain material market share in a highly technical niche product. We continue to believe it is at least a few years away and remind investors that automotive business is typically handed out to suppliers on a multi-year basis given the long technological and engineering development lead times, so we continue to believe that the 50 plus vehicle programs that Polypore is involved in give the company good revenue visibility over the foreseeable future.
Valuation: Our $72 target price is based on a 26.5x multiple on our 2012 EPS estimate of $2.71.