Exide: Why This Value Play Could Turn Into A Growth Play

| About: Exide Technologies (XIDEQ)

Leaders in the lead acid battery world have been beaten up by Mr. Market in the last three months. Exide Technologies (XIDE) in particular has seen its stock price cut in half this year. However, the start/stop market is providing this value priced company some exciting new growth opportunities.

XIDE (FY March 31, 2011)

XIDE (Q1 June 30, 2011)


$ 2,887 mln.

$ 745 mln

Gross Profit

$ 564 mln (19.5%)

$ 116.6 (15.6%)

Operating Income

$ 95.7 mln

$ 13.6 mln

Net Income

$ 26.4

$ -5.1mln

Exide covers two product segments. The transportation industry (mostly aftermarket car batteries) represents about 2/3 of the business, and the remaining 1/3 is industrial batteries (lift truck, mining, military, backup power).

In the market this year, XIDE stock is down about 50% year to date. Competitive battery maker EnerSys' (NYSE:ENS) stock is down about 32% year to date. Johnson Controls (NYSE:JCI) hasn’t fared so well either. It’s down 22% in the last three months. My readers know from my previous articles that I am bullish about XIDE’s value for money, and so the recent price drops deserve another look. The stock currently trades for a Price/Sales ratio of .12.

The company hasn’t released much news. Maybe that’s a problem. Exide! Get your head out of the lead price sheets and say something. It did present at the Jefferies Industrial Conference on August 10. You can listen to the webcast here.

The Battery Council International reported weak aftermarket battery shipments in the period from April to July of this year. Shipments for replacement batteries were down by 4.4% year over year in July. Battery council news, lackluster profitability in the June quarter, and general stock market weakness in August and September are possible pressures on the stock.

On the positive side, some of the growth potential that Exide mentioned at the Jefferies conference sounded very interesting.

The start/stop market (also called Microhybids) is rapidly emerging in Europe, and could be the biggest thing to happen for lead acid car battery makers in 50 years. Car makers need to do some serious improvements to reach the new US CAFE standards that will require them to achieve 34.1 mpg fleet averages by 2016, and 54.5 mpg by 2025. In the short term, start / stop technology is seen by many to be the easiest, and fastest way to get some MPG improvements.

Start/stop is essentially a technology to force a car to turn off when stopped in traffic. The role of the battery changes from mostly just starting the car a few times a day, to starting the car perhaps 100 times per day, and powering accessories while the car is stopped. A start/stop battery has to survive through many more cycles of charging and discharging, and also needs to accept a charge faster.

While some automakers like Toyota (NYSE:TM), Nissan and Tesla Motors (NASDAQ:TSLA) are pushing full hybrid or fully electrified cars that typically use lithium based batteries, it's likely the great majority of cars will use this "hybrid-lite" solution and lead-acid based batteries during the next ten years.

XIDE is gearing up production to meet start/stop with two battery families. The MHF battery is an improved version of the standard flooded battery. It is targeted at small cars like the FIAT 500, providing improved charge acceptance and 2-3x cycle life. The relative pricing of this battery is expected to be 25% higher than the standard flooded batteries.

For larger start/stop cars, XIDE has an AGM battery. Exide claims this battery has the best charge acceptance, and a 3-4x cycle life. The relative pricing of this battery is expected to be 60% higher than the standard flooded batteries. XIDE said it has been making AGM batteries in its industrial battery sector for 25 years, and is basing the new car batteries on this experience.

XIDE has revealed plans to ramp up production on both start/stop batteries lines. The company plans to expand MHF capacity from 1.1 million units in FY11 to 3.0 million units in FY14. It plans to expand AGM capacity from 0.45 million units in FY11 to 5.5 million units in FY15.

Of course, XIDE isn't the only manufacturer gearing up for start/stop. It will have competition, but it looks like the market pie is going to grow soon, and benefit all the lead acid battery makers.

Disclosure: I am long XIDE, AXPW.