Is It Time to Buy Exide?

| About: Exide Technologies (XIDEQ)

In a world full of bad stock market news, battery makers have been hit particularly hard. Whether or not you think the price drop is deserved, the sell-off on some of the up and coming lithium-ion battery companies is at least understandable. Who wants to hold on to highly speculative stocks at a time when holding even blue chip stocks feels a bit like gambling? Companies like Advanced Battery (OTCPK:ABAT), A123 (AONE), Valence (VLNC) and Ener1 (NASDAQ:HEV) have lost from 17% to 37% of their value in five days.

But even conservative battery companies like Exide Technology (XIDE) and Johnson Controls (NYSE:JCI), which make conventional lead acid products, have taken a huge hit. We have to ask, are people going to stop driving their cars when their batteries burn out? Are companies going to stop using their fork-lifts?

Exide in particular looks oversold. The veteran battery maker has lost about 35% of its value in the last five days. On August 4, the company reported sales and income for the June, 2011 quarter. Here are some highlights:

  • Net sales for the fiscal 2012 first quarter increased approximately 16% to $745.1 million from $644.7 million in the prior year quarter.
  • Operating income increased approximately 30% to $13.6 million from $10.5 million in the fiscal 2011 first quarter.
  • The company said it expects operating income in the fiscal second quarter to exceed the prior year period.
  • The company affirms previously provided fiscal 2012 operating income guidance of $160 to $170.

(Source - company quarterly press release)

While not exciting results, it is hard to see anything in recent results or guidance that would explain the particularly big drop at Exide.

Perhaps people are disappointed by the sales growth this quarter. The recent sales figures were increased by lead related price increases of $29.5 million as well as the positive impact of foreign currency translation of $54.2 million. Without these effects, the sales would have been $661 million representing about 2.5% growth.

The U.S. automotive segment was weak this past quarter, with revenue decreasing slightly. However the other segments, representing 70% of sales, grew by 26%.

For the Three Months Ended June 30, 2011 June 30, 2010
$ 217,597 $ 227,054

Europe & ROW

$ 227,220 $ 181,373

Industrial Energy

$ 88,544 $ 68,491

Industrial Energy
Europe & ROW

$ 211,734

$ 167,748

Lead pricing can have a significant impact on sales and profits.. Lead represented approximately 52.4% of the company’s cost of goods sold for the fiscal quarter ended June 30, 2011. The company points out (in the SEC filing) that, “Generally, when lead prices decrease, customers may seek disproportionate price reductions from the company, and when lead prices increase, customers may resist price increases. Either of these situations may cause customer demand for the company’s products to be reduced and the company’s net sales and gross margins to decline. The average price of lead as quoted on the London Metals Exchange (“LME”) increased 31.1% during the quarter."

This quarter, the sizable increase for lead price helped sales (lead price is built into some products automatically), but also had a negative effect on income.

Restructuring and asset sales and impairment costs were only $295k this year, compared to $8.2 million in the previous year.

VineSecurityJournal uses a proprietary valuation model for technology companies. Simply put, we project the future earnings of the company based on assumptions of revenue growth and potential net earnings. For Exide, our long term assumptions are pretty modest: 5% revenue growth per year, and net profits in the area of 3% of sales.

Risk is an important factor in our model. Risk speaks to the ability of the company to protect its revenue and profit flows into the future. It has an effect on our ability to project future earnings accurately. We assess investment risk on three tiers: Speculative, medium or low. Depending upon the risk level, we will discount the value of future earnings more aggressively. We continue to rate Exide as a “medium” risk investment.

In our recent report on Exide (just before the quarterly results), we predicted a target share price of $14. Nothing about our valuation has significantly changed with the new quarterly report.

Assuming that world stock markets stabilize soon, this slowly moving Gulliver could actually be a three-bagger!. You’ve heard it here first.

Disclosure: I am long XIDE, ABAT.