Polypore's (PPO) recent earnings give us a fairly certain projection of their operating costs for their recent battery separator plant expansion. Coupled with the relatively steady EV growth, we can project their growth in operating income in this market with a fair amount of certainty. Let's begin.
Here is the quarterly operating income for the Electronics and EDV segment for Polypore plotted versus the segment revenue. Forms a pretty straight line, which tells us it costs them about $20 million to keep the plants open every quarter, but they earn $0.71 for every dollar of revenue. Not bad for an advanced material.
Some quick analysis tells us that if Polypore meets their stated capacity of $400 million annually ($100 million quarterly), they will have quarterly operating income of $52 million, or over $200 million annually, an incremental increase of over $175 million over their current segment operating income.
So when might they get there? Well, a short analysis of the growth of electric vehicles should tell us, assuming they can keep the rest of their business at least current, and they grow with the segment.
First, taking their statements of how much is for EV and for consumer electronics to heart, they likely have around $25 million in sales to the EV market. According to a previous post, the battery requirement for this segment is growing at 107%, so they will add an incremental $25 million of quarterly revenue by 2Q14 and $50 million more by 2Q15, which, added to their consumer electronics business, will match their capacity of $100 million quarterly in the first half of 2015, less than 24 months away.
With 47 million shares outstanding, this means they will achieve a run rate of $3.72 in annual operating margin, which if translated to profit will more than quadruple their current $1.06. While the PE is high at 41 today, this segment will still be just getting going in 2015, likely only at 2% EV penetration and 5-7% HEV penetration.
What could go wrong?
- Their customers could read this post and press for, and achieve lower pricing. (Snicker ;-), my last post on Polypore was only read by ~600 people. Unlikely we are having a market effect here.)
- Their nameplate capacity could be fiction in reality. This is pretty common in manufacturing, so 80% of nameplate is a reasonable estimate.
- Growth rates could stall for EVs. I don't think this is likely given the $5,000 drop in the price of the Volt and $6,000 drop for the Leaf.
- They could face real competition from other competitors in this segment, losing share. This will happen, but not by 2015.
- The price of gas could drop by more than 50%. You bet on it--I'm not going to.
- The Republicans could win the interim election in a landslide and repeal the EV incentives. Again, you bet on it, but I won't.
IMHO, this growth is inevitable. The only question is whether Polypore can retain their prices as they grow. If they can, they should get economies of scale, increasing operating margin...but the curve is pretty linear in the range where we have data.
Because this will sit on the internet forever, I'd like to make two predictions in bold print:
- Polypore reaches $100 million in quarterly Consumer Electronics and EV segment revenue in the first half of 2015.
- Polypore announces another plant expansion in mid 2014, likely to be in the range of $200-400 million in capital.
For those of you who have made it to the bottom of this post, a little truth in advertising: I am on the management team of a small startup in this area, Dreamweaver International, www.dreamweaverintl.com, and watch Polypore closely not so much because they are a competitor, but because they are a bellwether and publish good financial information that can be analyzed.