C&D Technologies: Success Hinges on Cost Cutting

The sale of the Power Electronics Division leaves C&D Technologies (CHP) with $340 million in annual revenues, primarily in the Standby power segment that supplies such industries as telecom, computer, cable TV, and utilities.

In the past three years, the margins in this business have been hurt by the increase in the price of lead, its largest cost component that is up 33% in the past six months alone. Fortunately, CHP has been able to increase selling prices for its products to pass along most of this cost hit. Thus, although the lead price increase has hurt the industry margins across the board, it did not erode CHP’s competitive position. The Company remains the leader in its business, with strong product pipeline, customer relationship, and good quality.

The lead price spike has helped the management justify an aggressive cost cutting program that targets saving as much as $30MM in the next twenty four months. Combined with the $85MM in cash obtained from the PED sale, it puts CHP in a strong position to continue to benefit from strong economic growth around the world. The weak dollar has helped CHP win business in Europe, Middle East, Latin America and China, with export revenues growing 23% year-over-year.

To be sure, CHP has a fairly steep hill to climb. Its current gross margins now languish around 15%, well down from the 25% that the Company consistently earned in the mid 1990s (and that’s before the telecom bubble!). So, despite the volatility in raw material prices, the long term investment case for CHP seems to remain intact. An investment in the Company’s stock at the current levels ($5.50 per share) appears to be a reasonable bet that will depend on:

1) Continuing revenue growth from market share gains, and improving exports due to the weak dollar. CHP will also benefit from any breakthroughs it might gain from its efforts in solar power.

2) Cost reduction. If the management succeeds in its cost reduction program, it could restore the Company’s EBITDA margin back to 15%, the typical level of profitability in the 1990s.

Valuation

Revenue (post sale): $340MM
Operating income: $4MM
Margin, %: 1%

plus

Depreciation: $12MM
Goodwill: $9MM
EBITDA – run rate: $25MM
Margin, %: 7%

Expected cost savings: $25MM

EBITDA – 2009: $50MM
Margin, %: 15%

Enterprise Value: $400MM (8X EBITDA)
Less Debt: $155MM
Plus Cash: $85MM

Equity Value: $330MM
Shares: 25.6MM
Value per share: $12.90

Disclosure: Author has a long position in CHP

CHP 1-yr chart