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Summary

  • New government CAFE standards for 2025 are creating opportunities for new materials companies that focus on lightweighting.
  • Aluminum vs. steel is not the only major Investment theme playing itself out within lightweighting.
  • There are some interesting companies to watch in within the carbon fibers and specialty plastics sector that will benefit from the lightweighting process.

Lightweighting Linked to New CAFE Standards

In 2011, the U.S. announced that the Corporate Average Fuel Economy (CAFE) standards for 2025 were going to be 54.5 miles per gallon -- forcing many car companies to look at reducing the weight of their vehicles to achieve this goal. According to an August 2011 report from Frost & Sullivan, a 10% reduction in vehicle weight offers fuel savings of 5%-7% (in mpg). While there are other ways to improve the fuel economy of cars (improving aerodynamics and reducing rolling resistance), most efforts are going towards finding lightweight materials to use in automobiles without compromising safety and adding additional cost.

Steel Vs. Aluminum - Important, but Not the Whole Story

According to the Steel Market Development Institute, the percentage of steel in the average vehicles is approximately 60%. One of the major questions for investors will be: Can the steel industry create new steel alloys that are lighter than the aluminum alloys which are quickly gaining traction?

Earlier this year, Ford Motor Co. (NYSE:F) announced that they were going to be using aluminum alloys in future versions of the popular F-150 pickup. Their aim is to cut the weight of the vehicle by some 700 pounds, or 15%, in an effort to get better fuel efficiency than the current 23 mpg on the highway. Also earlier this year, Tesla Motors, Inc. (NASDAQ:TSLA), announced that they are going to make their Model S with body panels and chassis of aluminum.

While there are plenty of pure-play aluminum companies out there that will benefit from this accelerating trend of switching to aluminum alloys, the company that will probably benefit most is Alcoa, Inc. (NYSE:AA), by virtue of having deeply established relationships in the automobile space. Alcoa's chief sustainability officer told Forbes Magazine in June 2012 that they are working on research projects with every major car company, and had optimistic growth projections for his material, stating that "the average car currently has 340 pounds of aluminum; by 2025 that will grow to 550 pounds. The biggest growth will be in aluminum sheet. For every pound of aluminum you can take out 21 pounds of steel and 20 pounds of carbon over the life of the car."

Big Move Toward Carbon Fiber

While aluminum alloys are becoming popular materials, there is probably no more exciting material for lightweighting than carbon fiber. Earlier this year, several major auto companies announced that they have embraced this material, including BMW AG (DB:BMW) which will be making most of their i3 electric car from carbon fiber, and Chevrolet, a division of the General Motors Company (NYSE:GM), which will be making the new 2014 Corvette Stingray -- including the hood and removable roof panel out of a carbon-reinforced aluminum frame. There are some exciting companies in the carbon fiber sector that have cutting edge technology and are creating exciting partnerships with auto manufacturers.

  • Cytec Industries, Inc. (NYSE:CYT) is a specialty materials company based in Woodland Park, N.J., that does business with a wide variety of aerospace, automotive, and mining companies. They have had strong revenue growth of 37% from 2011 when they had $1,415M in sales, through the past four quarters of Q1 2014 sales of $1,946M. In March 2014, they announced taking an equity position in a privately held German company called C-CON Holdings GmbH that does design and engineering work for BMW Group, Daimler, VW and Audi. The two companies are going to develop novel Carbon Fiber Reinforced Polymer (CFRP) processing techniques for high volume production in the serial automotive market. This joint venture is seen as a major step to increasing CYT's automotive product offerings with major European car companies.
  • Hexcel Corp. (NYSE:HXL) is a specialty materials company based in Stamford, Conn., that does business with a wide variety of aerospace, defense companies and industrial companies. They have had strong revenue growth of 24% from 2011 when they had $1,392M in sales, through the past four quarters of Q1 2014 sales of $1,724M. They are the chief composite supplier for aerospace giant The Boeing Company (NYSE:BA), which makes the Dreamliner 787, a composite-built passenger aircraft. Amongst their products is the HexWeb® Honeycomb, which is made from thermoplastic, fiberglass, carbon, aluminum and aramid mechanical papers. As the leading supplier for one of the most innovative and high profile transportation vehicles in the world, they will benefit as automobile companies seek to replicate the success aerospace companies have made in reducing weight from their products.

Specialty Plastics

Not all of the lightweighting happening in cars is just replacing steel with either aluminum or carbon fiber. About 33% of the weight of a 2,700-pound vehicle is attributed to the interior (seats, doors, the ceiling, the paneling, etc.). There are several specialty plastics companies currently working with automobile companies that are worth highlighting.

  • Integral Technologies, Inc. (OTCQB:ITKG) has created an electrically conductive hybrid plastic that could replace certain metals in cars and planes, and has applied for the trademark, "Where Lightweighting Starts™." The company has signed major partnerships with Delphi Automotive Plc (NYSE:DLPH), BASF SE (OTCQX:BASFY), and is set to go into production with its South Korean partner, Hanwha Corp. (KOSE:A000880) in 2014. Hanwha Corp. is finishing the construction of an entire production facility dedicated to producing ITKG's core product, Electriplast®, for sale into Asian markets and the company should see its first major revenue this year from this partnership.
  • Shiloh Industries, Inc. (NASDAQ:SHLO) is a company from Ohio that provides lightweighting, noise and vibration solutions to automotive, commercial vehicle and other industrial markets, and their trademark is "Lightweighting Without Compromise™." They have had strong revenue growth of 48% from 2011 when they had $517M in sales, through the past four quarters of Q1 2014 sales of $765M. In May 2014, the company announced the purchase of privately held European auto OEM, Finnveden Metal Structures with operations in Poland that will allow them to expand further into European markets.

Huge Market Potential

According to an August 2011 report from Frost & Sullivan, the market for materials and chemicals in automotive lightweighting will reach $95.34 billion in 2017. With so much at stake for so many players in the industrial supply chain in the United States and around the world, this will be one of the more compelling stories to keep your eye on for years to come.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. I do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

Editor's Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Source: Automobile Lightweighting Has Begun - 4 Stocks To Own In The Carbon Fiber And Specialty Plastics Sectors