Battery Stock Packs Earnings Power

05/09/2011 1:20 pm EST

Focus: STOCKS

Taesik Yoon

Editor, Forbes Investor and Forbes Special Situation Survey

Shares of Exide Technologies could get a jump start soon as concern over lead prices dissipates, writes Taesik Yoon of Forbes Growth Investor.

Shares of battery maker Exide Technologies (XIDE) are down more than 20% since mid-February.

This is likely due in part to concerns over the price of lead, which is the key component in Exide’s batteries.

However, we believe profit taking may have been a bigger contributor. After all, XIDE’s stock had tripled during the six months prior to its slide.

The shares are now trading at just ten times forward earnings, and at a very attractive 0.36 times the expected current-year growth rate.

Chart 1

Furthermore, lead prices are well off their recent high, falling about 10% over a recent two-week stretch. Should this trend persist, Exide’s results in the current year could prove stronger than expected.

Exide makes most of its money from lead-acid batteries used in transportation and industrial applications. Its products power cars, trucks, off-road vehicles, agricultural and construction vehicles, motorcycles, recreational vehicles, and marine vehicles. The company also supplies batteries used to power electric forklifts, floor cleaning machinery, wheelchairs, railroad locomotives and mining machinery.

Exide’s back-up power products are designed to ensure uninterrupted power supply for telecommunications systems, computer installations, hospitals, air traffic control, security systems and utility, railway, and military applications.

Helped by the ongoing recovery in global economic conditions, and the rising popularity of electric vehicles, Exide has enjoyed steady sales growth throughout the past year. [For another supercharged play on the electric-vehicle revolution, see the recent recommendation of Polypore (PPO) by Brendan Coffey—Editor.]

The gains are clearly evident in the company’s recent operating results. Third-quarter net sales climbed 7.2% year-over-year, to $800.3 million. Higher selling prices were responsible for about $28.4 million of the gain, but the majority of the increase was the result of higher volume, which rose 4.5%. These results easily surpassed expectations.

We agree that a persistent rise in lead prices would hurt future profits. Lead prices remain elevated, trading about 11% higher than a year ago. Yet the stock’s sell-off since peaking in mid-February strongly suggests that this concern is priced in.

chart
Click to Enlarge

Moreover, much of the lead Exide uses comes from its own recycling centers, which are less affected by rising prices. The company has been fairly successful at offsetting the higher commodity prices with price hikes of its own.

After the most recent report, management noted that nearly all of its markets continued to exhibit improving trends. This may be why the current consensus estimate for fiscal 2012, which began last month, calls for a 28% jump in earnings, from the 75 cents per share the company is expected to earn in fiscal 2011 to 96 cents per share.

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