Short-Term Thinking Hurts Polypore

08/31/2012 2:00 am EST


Jim Jubak

Founder and Editor,

The stock was knocked around for the wrong reason this week, but that doesn't mean there are right reasons to worry, writes MoneyShow's Jim Jubak, also of Jubak's Picks.

OK, I get it: The current stock market doesn’t care about the long term. Buy or sell on the now. That’s it.

But do we all have to go along?

Case in point: Polypore International (PPO). The stock, not exactly a winner out of the gate since I added it to Jubak’s Picks on January 13, got kicked hard on August 28 by an analyst report that pointed out the obvious.

General Motors' (GM) decision to close down the Detroit-Hamtramck plant that makes the electric Volt for four weeks isn’t exactly good news from Polypore, which makes separators for lithium batteries used in electric cars.

The analyst note from Capstone questioned whether Volt sales, currently running at a monthly average of 1,525, could meet GM’s projections of a 1,865 sales rate for the rest of 2012. Capstone cut its earnings projections for 2012 and 2013 to $2.23 and $2.80, from $2.26 and $2.85.

On this 3-cent or 5-cent reduction in projected earnings, the stock fell 7.6%. The shares are now down about 40% from my purchase price.

Putting aside the question of whether a 340-car swing in monthly production one way or the other is significant for a company with $196 million in sales in its most recent quarter, I’d like to draw your attention to the big auto market story of the next day, and the stock’s reaction to it.

On August 29, news stories announced that the Obama administration had finalized new Corporate Average Fuel Economy (CAFE) standards that would require automakers to sell a product mix that recorded an average 54.5 miles per gallon by 2025. That’s a big increase from the 28.6 mpg standard at the end of 2011 and the 35.5 mpg goal agreed to by the industry for the end of 2016.

Under the rules, there are two ways an automaker can reach those goals. The carmaker can increase the fuel efficiency of cars and trucks it sells by selling fewer gas guzzlers, by improving the fuel efficiency of individual cars—by lowering their weight, say, or giving them more efficient engines—or selling more fuel-efficient hybrids.

Or it can improve its numbers by getting credits from the government for selling cars that use natural gas or that run on electricity, or that have stop-start circuits that shut off engines at stoplights, or that use less-polluting coolants in their air conditioners.

In practice, automakers follow both routes. Which means that the new rules will be a big boon to makers of electric and hybrid cars, and to suppliers who sell lighter-weight materials (carbon fiber) or devices like the ultracapacitors that these stop-start circuits will use.

So Polypore International rallied on the news, right? Nah. Shares fell another 1.7% on August 29.

Even shares of companies with less riding on auto sales did better. Maxwell Technologies (MXWL), a maker of ultracapacitors for cars and wind turbines, climbed by 11 cents on the 29th. Japan’s Toray Industries (TRYIY), a big maker of carbon fiber for autos and airplanes, climbed 20 cents on the day.

Today, August 30, shares of Polypore International were up 2.43% on a different analyst note, this one from Needham, saying that it expects Volt sales to exceed 2,500 cars in August and—this is the important point for the long term—that 80% of Polypore’s core businesses are improving. The note called the shares undervalued and gave the stock, which it called a “strong buy,” a target price of $42.

So, 1,525, 1,865, 2,500 Volts a month? Insignificant. What does matter is that Polypore, a dominant maker of separator membranes for lithium and conventional lead-acid auto batteries, gets 65% of its revenue from outside the US. Think the company’s revenues might just be a little bit dependent on car sales in China and in Europe?

Its biggest growth business recently has indeed been in lithium batteries, but not in lithium batteries for electric cars. The big revenues here have been in lithium batteries for portable electronics. Think the global economic slowdown might have some impact on those revenues?

The big question for Polypore is when China’s auto business might pick up (watch the People’s Bank for stimulus measures), and when the global economy might show enough growth so that consumers might increase their buying of portable electronics.

If you think the calendar for those improvements points to the latter part of 2012 and to 2013, then Polypore is currently oversold and should recover ground to the $36 to $38 level that has marked the top of its range for quite a while recently.

At the current $31.61, Polypore makes a good candidate for a swing trade. Anything beyond that $36 to $38 level will require not just some improvement in the global economy, but real strength in the economy in China and the United States. I can see that happening if the US doesn’t drive off a fiscal cliff in January...and if the world manages that escape, I see Polypore as a $44 a share stock in August 2013.

Lots of “ifs” in those target prices, but Polypore’s business is hitched to a very unpredictable global economy—and not to the sale or no sale of a few hundred Volts.

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, 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 March. For a full list of the stocks in the fund as of the end of March, see the fund’s portfolio here.

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