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Buy Polypore International (PPO)
01/13/2012 2:16 pm EST
Shares of Polypore International got hammered by the scare about the danger of fire in the batteries of General Motors’s (GM) Chevy Volt.
That’s totally understandable. Ion exchange membranes for lithium batteries used in portable electronics and electric-drive vehicles make up about 24% of the company’s sales over the last four quarters. (Separators for traditional lead batteries make up about 50% of sales.) And separators for electric cars are by far the biggest opportunity ahead of Polypore International. The company estimates that an increase in the electric car share of the global vehicles market to 5% from less than 3% today would double the demand for ion exchange membranes for lithium batteries.
Anything that threatens to slow that growth rate is therefore a big deal for Polypore International. And the news at the end of November that the National Highway Traffic Safety Administration had launched an investigation into battery fires in the Chevy Volt certainly qualified as big news. Shares of Polypore International, which hadn’t exactly been tearing up the track anyway, fell from $51.95 on November 28 to a low of $43.18 on January 4, 2012.
But in recent days the shares have rallied back to $52.32 as of 2:00 p.m. New York time today, January 12, and in the process have moved back above their 50-day moving average. Next resistance is at $52.85 (the 200-day moving average) and then $55 (the gap in late November.)
So what’s happened to turn the shares around? A growing appreciation of just how big a deal the Chevy Volt fires weren’t. And how little they seem to have changed sales trends for electric vehicles.
That’s largely because the “problem” was so removed from the likely experience of a Volt driver. The fires came three weeks after a side impact test at the National Highway Traffic Safety Administration when the batteries in a car that had been in the test and then in storage for three weeks caught fire. An investigation revealed that the batteries hadn‘t been drained and that coolant had leaked and caused a short-circuit and fire three weeks after the test crash.
Modifications to prevent even this kind of problem are extremely simple. GM will install extra supports, weighing about two to three pounds, in already purchased and new Volts that will direct the force of a side impact crash away from the battery, and a new tamper-resistant bracket will prevent overfilling the battery with coolant.
That’s it. The big piece of that from Polypore International’s point of view is that there’s no need to redesign the batteries or to develop new battery technology. The National Highway Traffic Safety Administration has crash tested a Volt with the modifications and found no intrusion into the battery after the crash. The agency is also monitoring the crash-tested Volt while it sits in post-crash storage. Two weeks after the initial test, the agency reported no problems.
The test results come at a critical time for Polypore. Anticipating growth that would bring market penetration for electric drive vehicles to 6% of the auto market by 2015, the company had invested $341 million in expanding its lithium separator production capacity in the United States and in Korea. With the latest results from GM and the U.S. government, Polypore doesn’t face the worry that these new production lines will sit idle.
Removing some of the uncertainty from the electric vehicle story also removes an overhang from Polypore’s other growth stories. The membrane technology company sees 7% to 10% annual growth in membranes for pharmaceuticals and biotechnology and 20% to 25% growth in membranes for desalination pre-filtration, for example.
Polypore is due to report fourth quarter earnings on February 22. Wall Street analysts are expecting 53 cents a share for growth of 26% from the fourth quarter of 2010. That would bring growth to 65% for 2011.
But analysts are expecting a huge drop in growth to just 20.3% in 2012. I think that’s wrong—and a reflection of pessimism left over from the Volt story and fears that Asian economies, which buy a lot of traditional lead batteries, will slow abruptly in 2012.
But even if the analysts were right, the recent pounding of the share prices puts the forward price to earnings ratio on Polypore at even that 20.3% growth at a low 18.9. That’s more than reasonable for 20% growth and cheap if Polypore winds up beating those low estimates.
With modest economic growth in U.S. and Asian markets in 2012, I get a $70 a share target price for this stock. As of January 13, 2012, I’m adding these shares of my Jubak’s Picks portfolio http://jubakpicks.com/
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Polypore International as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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