Polypore International: Lithium batteries and more
It’s often been said that one of the biggest mistakes investors make is buying stocks in companies they don’t understand. The problem with that advice is that it can be rather limiting, confining individual investors to the stocks of grocery chains and certain popular coffee shops, while they overlook perfectly good companies that make things like specialized microporous membranes.
What, you ask?
It is not exactly a household word, but the specialized microporous membranes made by Charlotte, N.C.-based Polypore International Inc. (NYSE:PPO) are the sort of thing that no one seems to have heard of but may unknowingly come in contact with rather often. This contact could occur with lead acid batteries that run power tools and hybrid cars, filtration equipment that provides clean drinking water and a variety of health-care technologies such as blood dialysis equipment. The membranes essentially work to separate and filter, either to clean a substance such as water or to isolate the substances required to make products (such as advanced batteries) work properly.
A leading supplier of these omnipresent membranes, Polypore went public last July, and its stock has been on a pretty choppy ride since then. On their first day of trading, the shares opened at $19, below an expected range of $20 and $22, and then swung widely between $12.15 and $26 per share. They’ve been on the rise lately and closed Monday at $24.29 per share.
While there are a number of reasons for Polypore’s stock volatility (including its multiple restructurings, its somewhat complex ownership prior to going public, and its more than $1 billion in debt at the time of its IPO) the company’s fundamental outlook seems strong.
Four analysts who follow the company are projecting net income will rise to $0.95 per share this year and to $1.15 per share in 2009, compared with $0.44 per share next year. Three analysts who track revenue see sales rising to $604.1 million this year and $647.3 million next year, from $537.1 million in 2007.
In 2006, the company reported a net loss of $29.6 million on revenues of $479.7 million and said its EBITDA (earnings before interest, taxes, depreciation and amortization) were $139.8 million.
Robert W. Baird analyst Richard Eastman has an “outperform” rating on Polypore and recently issued a $27 price target on its stock, which he said, following three separate restructurings, now has a stable base of customers, and is working aggressively through both acquisitions and internal R&D to expand into new markets. Most recently, Polypore acquired Yurie-Wide Corp., a South Korea business, which it said will help it expand its business making membranes for the lithium ion market that is enjoying a big increase in demand due to the rather sudden popularity of hybrid and electric cars. Earlier this year, Polypore bought Microporous Products LP, which will also advance its battery separator technology.
If an outsider finds it hard to understand Polypore’s technology, the company itself admits it is sometimes challenged to predict how the markets it serves will evolve. Polypore has recently benefited from the surge in demand for hybrid cars, but says there are so many factors out of its control that affect the markets it serves, that it inherently takes on risk when it invests in the future.
“As I look forward, I think the biggest challenge is the predictability of growth,” CEO Robert Toth said during a recent conference call, in commentary that seemed unusually candid for a top executive. “Three years ago, we’d have been sitting here debating whether or not consumers will buy hybrid electric vehicles, and today virtually every auto manufacturer has a development program going on.”
Because its products are frequently incorporated into cutting edge technologies, which can dramatically alter its revenue base, Toth said the company does not manage its business quarter to quarter, but focuses more on the long term.
There are a couple of other key details any potential investor should know about Polypore. Its top five customers constitute about a third of its sales, which could leave it particularly vulnerable to the loss of any one customer. In addition, the private equity firm Warburg Pincus, which took Polypore public, continues to own about 63% of the company’s outstanding shares. There has been no indication that the firm is intent on reducing its stake any time soon, but given the impact that such a move could have on the stock price, it’s something to keep in mind. Finally, the company holds substantial debt, about $864 million as of its last reporting, and in order to remain on the cutting edge of the markets it serves, it needs to invest in R&D at an aggressive rate.
That all adds up to a significant reason to take pause before jumping in. Indeed, Polypore may not be the right investment to those with a very low tolerance for risk or volatility.
On the other hand, admitting that you can’t predict the future is often a sign of true wisdom and CEO Toth should get credit for not trying to whitewash over the unpredictability of some of the markets the company serves. While Polypore can’t be expected to call every new trend involving microporous membranes ahead of time, its track record with lithium batteries, as well as its outlook going forward, shows that it’s doing pretty well at it. As a business whose products are used in so many critical applications, in an industry where few competitors are diversified, the outlook for Polypore looks bright, even if it is not crystal clear.
About the Author
Contributing author Andrea Orr has worked as a financial and business journalist for more than 15 years in New York, Los Angeles and northern California.
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