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The stock of Exide Technologies (XIDE) has taken a major beating lately. This week, you could buy every share outstanding for $213 million, this for a company that is doing about $3 billion in sales. It is easy to be pessimistic after several tough years, but the share price is now so low, that even a modest amount of profit could result in a 3x increase in share price.

A large part of Exide is operating in a very mature business. Basic flooded lead-acid batteries have not changed much in concept for many years. Although it would tough to get exciting growth and high profits from the business, Exide only has to squeak out a few percent net profit to make a big different in share price.

There isn’t a big difference on a percentage basis to go from a loss position to three or four percent net profit. Net loss in the September quarter was $3.6 million on $ 773 million dollars in sales.To get to plus three percent profit, they needed to generate about $27 million dollars more profit.

Some unusual events affected the last quarter. There was a $5.7 million charge for some irregularities at a Portuguese recycling subsidiary, and the market for aftermarket batteries was down this summer. According to the Battery Council International, replacement battery shipments in July-September were down 3.8 to 5.8 percent from the previous year.

An extra 4 or 5 percent of market would have gone a long way toward bringing profit back into the black. Still, Exide can’t wait around for the battery market to have a great year. They need to reduce costs, particularly in their Americas Transportation Sector. They announced some strong measures to get costs in line including taking the Bristol manufacturing plant off-line.

Getting to profitability requires some diligent work on cost reduction. They announced five actions to address performance of the Transportation Americas:

  • New Leadership for Transportation America.
  • Plant consolidation
  • Product and process cost improvements
  • Reduce spent battery acquisition costs
  • Streamline SG&A

Through these activities, the company identified potential savings of $37-$43 million per year in cost savings.

We Are Cautiously Optimistic

Exide needs to squeak another $25 or $30 million in profit out of their quarterly sales. Traditionally the Dec/March quarters are seasonably strong, as people buy more batteries in the winter. We can hope the bad news from Portugal is behind us. Their industrial battery sectors have been relatively strong.

People need flooded lead acid batteries, and will need them for a long time. Exide for all their excruciating boringness is a leader in the field and we are taking a leap a faith that they have as good a chance as anyone of getting some profit from a business they know so well.

Beyond cost reduction, they have some significant opportunities to pick up the pace. The industrial battery segment now represents 40% of the sales and will have a larger impact on financial results. The shift to AGM batteries (and maybe something better than AGM batteries) for start-stop automotive applications is an opportunity for a much higher average revenue and profit per unit.

The company announced that it plans to move from annual production capacity for AGM facilities, from 2 million units per year to 8.5 million units per year.

Heavy insider seller Jeffrey Gendell fund had already sold about 2/3 of his holdings by September 26.

We'd like to see the company announce a strategy for gradually but clearly shifting away from the flooded lead acid aftermarket. Enersys (NYSE:ENS) has done relatively well by staying away from this segment. An acquisition or two could wake up its potential. Do a deal with A123 Systems (AONE), or find a strong Chinese partner. Perhaps revisit their discussion for an technology partnership with Axion Technology (OTCQB:AXPW).

In the aftermath of all the selling, we see the upside opportunity on the stock as much higher than the downside risk. We’re planning on holding onto our stock (and our nose) for another quarter or two.

Disclosure: I am long XIDE, AXPW.OB.

Source: Exide Technologies Has Huge Upside Potential