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  • Exide's Battery Not Spent 15 comments
    May 24, 2013 12:02 PM | about stocks: JCI, XIDEQ

    Recommendation: Buy
    Price Target: $1.75

    A string of negative news and potential market over-reaction has punished Exide (XIDE) shares for the past 2 months. Exide's business is a highly competitive and commoditized business where it sells batteries to car manufacturers, auto parts retailers such as Pep Boys, and a wide spectrum of industrial batteries around the world.

    Exide has been on my investment radar since the stock nosedived a couple of years back and traded between $2.00 - $4.00. The business economics did not attract me and it was not trading below BV to merit a closer look or investment.

    With the stock trading below $1.00, I thought it was time to take a closer look and see if the market was right or if there was value here.

    Exide Multiples and Key Info
    Current PriceBook Value TTMP/BVRevenueP/SMkt CapEnterprise Value
    $0.52$3.36.24$2.92 Bil0.02$41 mil$792 Mil

    In the article I will discuss a couple of major points to rectify my investment thesis.

    1. Exide's Bankruptcy Risk
    2. Regulatory shut down of the Vernon, CA Lead Recycling Plant
    3. Shareholder Lawsuits

    1. Bankruptcy Risk
    Exide is no stranger to bankruptcy, after over-leveraging itself in the early 2000s, they went Chapter 11, re-emerging in 2005. This type of event is normally burned into every investors memory. To be clear, Exide's current numbers are no where near the pre-bankruptcy numbers of 2001.

    What the numbers tell us:

    (Exb. 1, click to enlarge)

    Liquidity: (Exb. 1)
    Currently Exide stands at no immediate or short term danger. It's current Defensive Interval Ratio is 79 days. Meaning if they would stop all operations completely, they would have close to 3 months of money to pay bills. A distressed company with under 30 days would be a red flag.

    Exide's April 4th announcement of better than expected free cash flow of $50 and total liquidity of $230+ million is very positive material information. (click here to read release)

    (Exb. 2, click to enlarge)

    Solvency: (Exb. 2)
    The solvency ratios do not paint a rosy picture for Exide. Their financial leverage has grown to 6.5, 20% above their historical DFL. The Fixed Charge Ratio dropped below 1. Late in 2012, Exide purchased over $5 million worth of their Sept 18, 2013 convertible debt which could have negatively contributed to the lower Fixed Charge Ratio. These are key numbers to watch but do not conclude an imminent demise of Exide.

    On April 3, 2013, a Debtwire.com reported Exide consulting with Lazard sent Exide shares tumbling over 50%. This information was translated by the market as a potential bankruptcy chapter 11 reorganization by Exide.

    After the Exide news release, the stock did not rebound back to previous pricing. It was enough to scare away a lot of investors and speculators.

    If not bankruptcy, then what could this mean?

    My best guess, to restructure debt agreements and negative covenants. Why? The Frisco, TX property sale and recycling plant closure. Management has declared a $37 million dollar profit from this sale to be recognized in the FY 2014. Unfortunately due to debt covenants, this money will be put in escrow and Exide will not have any access to it. This is a major reason why I believe Exide is consulting with Lazard.

    2. Regulatory Shutdown of Vernon, CA Lead Recycling Plant

    The major point I would like to make here is, in my opinion, Exide no longer wants to be in the lead recycling business. It wants to concentrate on making the best batteries in the market. If I'm right, Exide will no longer spend precious investment dollars into these facilities.

    Not too long ago, recycling lead was a profitable 3rd party sales business and gave Exide a competitive advantage on gross margin. This no longer exists and is the reason why Exide has shut down two recycling facilities in the last year. (Frisco, TX & Reading, PA)

    The shutdown of these two facilities has left a lead raw material supply gap of ~25%. They are now buying 25% of their lead needs through contracted suppliers. With the shutdown of their Vernon,CA plant, they will have to outsource more lead. This should not be a material operational problem.

    I believe that Exide knew without spending a lot of money, there was a high probability of being shutdown by the CA EPA, and decided against investing into a unprofitable business. This is the same reason why they idled the Reading, PA plant.

    What happened to the lead recycling business in the USA?

    Increased environmental regulations under the Obama administration have harmed this once profitable enterprise. Johnson Controls (JCI), Exide's main competitor, and largest battery producer in the world has moved the majority of it's recycling operations to Mexico. The environmental regulations are not a quarter as stringent compared to the USA.

    These developments have negatively effected Exide in two ways. (1) by increasing the operational cost to recycle in the USA. (2) Increasing the cost of spent batteries where Mexican recyclers can pay more for spent batteries because it costs less to recycle. This has resulted in downward pressure on Exide gross margins for years now.

    Health & Environmental Liabilities?

    The Vernon, CA plant was shut down for 2 reasons. Arsenic emissions exceeded maximum accepted levels and a damaged water drainage pipe. Based on historical environmental cleanups and penalties, Exide could be on the hook for $8 - $10 million. (Most recently, Exide has an environmental cleanup liability for $6-8 million on the 1999 Tampa, FL closure)

    Currently, health risk liabilities caused by Exide's air pollution and water contamination does not look probable and non-material. The factory is in a highly industrialized zone and ground contamination has been prevalent for years. Sole responsibility falling on Exide would be highly improbable. Based on regulations, cancer-risk has exceeded the maximum allowed by CA EPA, 1 in 1 million (.0001% chance of cancer). Exide's air emission Hazard index is 156 in 1 million. The effected population is 110,000. Which implies a .0015% chance of chronic cancer or approximately 17 individuals adversely effected after long term exposure. To be conservative and account for any uncertainty this health liability may produce, $10 million should suffice.

    Overall, an investor can conservatively price a $20 million liability for any unknowns on the Vernon, CA facility.

    *Important*
    From 6/3/13 to 6/5/13, the California EPA will be holding a hearing on behalf of Exide and the plant suspension.

    3. Recent Shareholder Lawsuits

    The complaint filed:

    "The Complaint alleges that defendants failed to disclose that: (A) Exide was polluting the environment with potentially fatal levels of arsenic, and exposing almost 110,000 residents near its Vernon, California battery recycling facility to dangerously high levels of pollutants; (B) based on actual and projected revenues and expenses Exide would not be able to meet its debt repayment obligations and other pledges and promises under its debt agreements and indentures. The lawsuit claims that when the market learned of this information the value of Exide securities dropped damaging investors."
    - Rosen Law Firm

    Interesting enough, approximately four other law firms followed suit and filed the same class action for shareholders who lost more than $100,000.

    These lawsuits will most likely NOT hold up in court, shareholders were disclosed and notified in last year's Aug 10-Q of potential regulatory problems at the Vernon, CA and fines paid. This complaint dangerously implies imminent doom for Exide and this flooded stock ticker news feeds.

    Sept 18, 2013 Convertible Debt
    If I am correct about Exide's current health and liquidity position, this has given Exide management a rare opportunity to buy back it's debt on the open market very cheap. ~$55 million of the 9/18 Convertible Debt was left outstanding and it was trading at a 70% discount.

    9/18 Conv Bond Detail

    If management was savvy, they could have saved the companies millions by buying it up. Only time will tell.

    Conclusion

    Exide is a struggling company with poor business economics. This does not mean it is worthless. One can buy a great company at a terrible price or buy a bad company for a great price. In this case, I believe the latter is true for Exide.

    After all the hysteria passed and the "electronic herd" trampled this stock. Exide presents itself as a classic Benjamin Graham "cigar butt". According to the most current data and my interpretation, I believe Exide's problems are manageable with healthy economic conditions and cyclicals rebounding.

    My price target is $1.75 in the next 6 months.

    Disclosure: I am long XIDE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Themes: dont-tag-as-pro Stocks: JCI, XIDEQ
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Comments (15)
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  • superfeeed
    , contributor
    Comments (22) | Send Message
     
    Information is power. Shorts have organized through the assistance of debtwire to communicate WHEN to short the Company. Earnings will end this Grift...

     

    Short % must be over 20% of the float.
    24 May 2013, 03:09 PM Reply Like
  • stealthology
    , contributor
    Comments (308) | Send Message
     
    Informative piece, thanks for the writeup. Followed.

     

    Bought in at ~.90, and just bought double that at ~.46. Definitely a riskier play, but I like the odds.
    24 May 2013, 03:32 PM Reply Like
  • cccbondguy
    , contributor
    Comments (3) | Send Message
     
    thanks for putting together the best case that can be made for Exide survival--lotsa facts, lotsa information, well connected, and very articulate!!!

     

    thanks very much

     

    and a whole lot of us are hoping that you are right!!!!!!! :-)
    24 May 2013, 05:49 PM Reply Like
  • joyjox007
    , contributor
    Comments (94) | Send Message
     
    Hope it survives for next 2 weeks. Bought at $0.49
    25 May 2013, 08:36 PM Reply Like
  • Teodor Rasa
    , contributor
    Comments (144) | Send Message
     
    Author’s reply » Thanks for all your comments, piecing all the public information and news that I found... I thought my recommendation was logical.

     

    Another large drop in stock price induced by WSJ reporting the same news from 2 weeks ago. This is a stock is very hard to own and even harder to trade.
    7 Jun 2013, 10:23 AM Reply Like
  • alisulaiman
    , contributor
    Comments (3) | Send Message
     
    thank you for trying. I do agree with analysis you have made. but can you answer this question, what is after the Bankrupcy ? i mean the company seems to be moderetly liquid. Why should the stock plung to zero ??
    10 Jun 2013, 09:11 AM Reply Like
  • Teodor Rasa
    , contributor
    Comments (144) | Send Message
     
    Author’s reply » Alisu,
    thanks for the comment. I am trying to figure out whether there will be value left for common shareholders after the reorganization. In most cases no.

     

    But this is a company that has a positive book value seeking protection. According to WSJ, Exide filed Ch 11 with assets of $1.9 bil and liabilities of $1.1 bil.

     

    I believe this makes a case for Common Shareholders to still have value after the reorganization.

     

    I'll update you after I have looked into it more. Sorry to all my readers who took my recommendation and lost money. I also lost on this one... I really thought my analysis was correct.

     

    Any thoughts on the Ch 11 reorganization from anyone else?
    10 Jun 2013, 09:25 AM Reply Like
  • agorbounov
    , contributor
    Comments (7) | Send Message
     
    Not to make my first comment here an antagonistic one but... come on! Just because the book value of assets exceeds the value of the liabilities does not mean that the equity will get any recovery, at all. First off, you just got primed with $300mm of extra debt (the $500mm DIP of which $200mm will be used to take out the ABL revolver). Second, you have huge contingent environmental claims from Vernon and most likely other plants, which will either get administrative status (e.g. not affected by the BK filing and paid in full) or at the very least general unsecured status (still senior to equity, of course). You'll also have plaintiff's lawyers coming out of the woodwork suing XIDE for poisoning and all sorts of other stuff. These will take years to work out but will probably have to be settled before the equity gets anything. Finally, you have your usual BK value leakage - lawyers and advisors, lost business as people don't want to deal with an insolvent entity, etc. You think there will be anything left for the equity??

     

    Just do the math:

     

    $10-20mm admin expenses
    $500mm DIP
    $80-ish mm
    $675mm 2018 notes
    $55mm convert
    $100mm or so payables

     

    That's $1,330 already. And that's before 1) executory contract rejection claims; 2) CERCLA claims + other environmental stuff (unknown); 3) god knows what else. Pretty soon you're talking about $1.5 billion in claims that are senior to you and that will get paid before you get a cent.

     

    So subtract your $380 in cash and you get a liability stack that is more than 9x your trailing EBITDA. If you think this is a 9x+ type business while it's in bankruptcy, I have quite a few things to sell you!

     

    Last, but not least, the ultimate recovery value will be determined by the court. Given where we are with this business, I don't think that'll be a party to which equity holders will be invited...
    10 Jun 2013, 01:04 PM Reply Like
  • agorbounov
    , contributor
    Comments (7) | Send Message
     
    as in, "$80-ish mm receivables securitization facility"... sorry!
    10 Jun 2013, 05:37 PM Reply Like
  • Gtg007
    , contributor
    Comments (63) | Send Message
     
    Going up again after Loan approval...http://bloom.bg/11wQ8Ml
    11 Jun 2013, 01:00 PM Reply Like
  • Bivus
    , contributor
    Comments (60) | Send Message
     
    +43%...

     

    How do they know there won't be equity dilution or equity will amount to anything at all? Without more information, looks like a gamble.

     

    Does anyone know where to access the court documents?

     

    8-K filing says it's Case No. 13-11482-KJC in Delaware, I found it on their website but they use this PACER system. From wikipedia: The New York Times has criticized PACER as "cumbersome, arcane and not free".

     

    The SEC information is freely available, how can the courts give such restricted and non-free access to public information that is precisely supposed to be available to anyone...
    11 Jun 2013, 01:50 PM Reply Like
  • agorbounov
    , contributor
    Comments (7) | Send Message
     
    http://bit.ly/13CpDIw

     

    Most of the time, the company in Ch. 11 will either set up a website like the one here where you can access the docket, or you can access it through their claims agent. PACER is usually the last resort.

     

    And the only reason the equity is trading at all is because there is commission value in it (for the brokers, not for the investors). At the end of the day, it's a zero, as are, most likely, the converts (they trade at pennies on the dollar now... the bonds trade in the high 50s and I think it's probably too high).
    12 Jun 2013, 02:55 PM Reply Like
  • Bivus
    , contributor
    Comments (60) | Send Message
     
    Thanks for that.

     

    It does not look good for the equity.

     

    They actually spell it out in one of their motions: in the case of reorganization of any remaining business,

     

    "... it is likely that a majority of the equity of the reorganized Debtor would be distributed to creditors of the Debtor in exchange for all or part of their claims".
    12 Jun 2013, 05:04 PM Reply Like
  • Teodor Rasa
    , contributor
    Comments (144) | Send Message
     
    Author’s reply » I sold my shares and bought the 2013 secondary conv bonds. This is still a speculative investment but it is a step above the common.
    13 Jun 2013, 09:29 AM Reply Like
  • Gtg007
    , contributor
    Comments (63) | Send Message
     
    I bought common shares...hoping it to go $1 soon IMO..I know its a Gamble...but I am ready to take...Lets see...After filing BK, they got court and Loan approval and Vernon thing might re-open IMO..
    13 Jun 2013, 09:32 AM Reply Like
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