Consumers are embracing a world without wires, and that’s great news for Polypore International (PPO). Polypore gets the lion’s share of its revenue from selling membranes for both next generation lithium batteries, powering an endless stream of laptops, smartphones and iPads, and conventional lead acid batteries used in cars, boats, trucks and forklifts.
This year, as many as a half billion smart phones and tablets will be sold, marking the first year where sales of such devices have overtaken traditional plug in PCs and notebooks. These small devices are getting more powerful with faster battery hogging processor power.
The short lifespan of mobile devices, tied to innovation and the occasional drop, provides ongoing demand for Polypore products. Polypore’s membranes sit between the cathode and anode, providing the necessary ion exchange function. They’re a key component in the battery, so rising consumer electronic demand for portable electronics-- whether phone, tablet or game system-- results in higher demand for PPO’s product line.
But, it’s not just consumer electronics driving success at Polypore. One of the newest markets for Polypore’s lithium membranes is the auto market. High gas prices have driven development of electric drive vehicles (EDV). Toyota (TM) continues to innovate in lithium ion battery technology. The new Chevy Volt has garnered significant attention in the press. And, most major automakers will offer a hybrid version in 2012. The EDV market offers considerable upside given the share of EDV sales will likely be 3-5% by 2015. If EDV market share does hit 5%, it will translate into a doubling of Industry membrane demand, bullish for Polypore.
Polypore doesn’t just benefit from next generation plug-ins and hybrids. Its traditional battery business is strong thanks to rapid emerging market auto sales growth. Rising affluence in developing markets including China and India mean more cars on the road, and more future demand for replacement lead-acid batteries, which account for 70% of all battery sales. Across the globe, we’re on track to have more than one billion vehicles in operation, up from less than five hundred million in the early 80’s. As a result of rapid auto sales in Asia, Polypore’s lead acid battery related sales in the region have doubled since 2005.
Polypore also sells into environmental and healthcare industries. Its products filter water for consumption, a market it expects to grow 5-8% for potable and 20-25% for desalination. Its industrial applications include ultrapure water for microelectronics manufacturing. The company's products are used in various blood filtering applications, an industry growing 6-10% as the population ages and lives longer.
The company gets 36% of its sales from Asia, which is growing rapidly. In Q4, company wide sales were up 12% to $169.5mn while EPS rose 17% to $0.42. Ex-currency, sales rose 14%. For the full year, sales were $616.6mn, up 19%. Energy storage revenue rose 11% in the quarter and 21% for the year. Lead battery sales last year rose 12% from 2009 while lithium battery separators rose 52%. Healthcare products sales were up 5% on the year while filtration sales rose 35%.
Overall, the street expects Polypore to earn $2.31 a share in 2012, a second consecutive year of above 30% earnings per share growth. With a PE of 23x future earnings, Polypore isn’t a cheap stock. But, given analysts expected only $1.90 in 2012 90 days ago, there is considerable opportunity for upward revisions as markets expand. This suggests patient investors will benefit from buying dips in the stock this year.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PPO over the next 72 hours.