Polypore -- A Falling Knife
Board: Value Hounds
Analysts have great power over the direction stocks move. There is usually no other comment or reasoning behind the opinion and yet the market reacts quickly and often violently when the upgrades and downgrades are published.
Jan 31 was notable for a handful of downgrades on companies I follow [Potash Corp, IPI, CF Industries]. It was doomsday for Polypore. With sufficient digging, it was possible to find the forces behind the analyst’s downgrade in this case.
Polypore dropped an astounding 30% after the downgrade to sell by DA Davidson. Apparently, one of its former customers, LG Chem, will now become a competitor and plans to begin production of filtration membranes used in batteries. Polypore’s medical filters are not under fire from LG. Unfortunately, energy storage is 72% of revenue. PPO loses revenue and gains a competitor.
Polypore’s response to yesterday’s stock market decline:
“Typically, the company does not comment on industry news. Polypore has no new news to report. We remain confident in the premises used to justify the lithium battery separator capacity expansions associated with accelerating industry demand for electric drive vehicles.”
DA Davidson dropped the value per share from $73 to $45. My own valuation of fair value was $54 if they could continue to grow by at least 13% for 5 years tapering down to 6% by year 10. Davidson was perhaps a little over-optimistic about PPO’s future and is maybe a skosh pessimistic to the threat of competition with a 38% fair value cut.
It will take LG time to come up to speed on manufacture and sales of membranes. LG predicts production to start at the end of 2012. They currently make petrochemicals, value added plastics, pvc, acrylates, engineering plastics, rechargeable batteries, and semiconductors. Lithium ion battery cells is an expansion business for them and membrane filters would be a natural progression.
Battery membranes is not a particularly wide moat business and customers can switch without a great deal of trouble. Polypore does have an established base of customers and if they stay competitive may not lose much. LG is not in production yet but the threat to growth is enough to convince investors who love momentum growth stories to leave the party early.
Polypore reports earnings February 22, but may have little comment on the competition. There will not be much they can project this early regarding LG’s strategy.
Investment in Polypore comes down to the lithium ion battery and the growth vehicle that electric cars can provide. At present, fast growth in hybrids and electric cars looks doubtful. PPO has invested heavily in expanding their lithium ion battery business.
Global auto executives were recently polled by KPMG and 2/3 expect e-vehicles will account for only 15% of sales by 2025. In the US and western Europe that drops to between 6%-10%.
Part of the headwind is affordability. In the survey, executives predicted it would be 5 years before e-vehicles can be expected t price competitively with traditional gas burners.
In a new report, J.D. Power analysts said that global sales of electric-drive cars are expected to reach 940,000 units in 2012 compared to 2011 sales of 732,000. They predict 3 million units will be sold in 2015. Despite the growth, that is only 3.4 percent of global light-vehicle sales. A high percentage the sales of e-vehicles are predicted to be in China
The Prius has sold more than 1 million since 2000, becoming a top ten seller, and 2 million hybrids of all types have been sold, with annual sales in the 250,000 to 350,000 range.
The recent market entrants the Volt and Leaf are selling far better than e-vehicles in the first part of the decade. A total of 17,345 Volts and Leafs sold in 2011 or nearly double the first year sale figures for the 2000 gas-hybrid vehicles and more than triple the number of Pries sales.
While e-vehicles are not the rocket to riches that was expected, sales may be strong enough for Polypore to manage some growth in spite of competition. Momentum stock lover will not be satisfied with 10% to 15% growth given the amazing 25% to 30% growth of the last three quarters. The rest of us may find some value here. The company is certainly headed in the right direction.