User 73518

Zoltek Companies: Running out of Wind

The writer suggests that Zoltek might not perform up to expectations. That is always the case with any company. But we each have to look at what we think the future will bring and then make the investment call.

The writer suggests a possible dilution from a future security offering. Hopefully the analysts have already factored that into projections. In a recent RBC report, they say they expect a financing mix of equity and debt in the first half of 2007.

So what are we looking at immediately ahead? The next revenue and earnings numbers should be available during the week of May 7th. Those numbers will hopefully confirm that we are on track for the growth we are all looking for. But to me, a more important event will be the release of the revised contract terms with Vestas. The existing contract matures at the end of this year. Stuart Bush at RBC says he believes the revised contract could be 2.5 to 3 times the size of the prior yearly levels. If the contract comes in at those levels, that could add 10 to20 cents to his 2008 estimates and further 2009 growth. This kind of a contract revision would most likely be considered a material event requiring immediate disclosure, creating a catalyst for this stock. Vestas is the largest wind turbine manufacturer in the world. Such a contract would not only accelerate revenue and earnings, but it would remind the world once again, that Zoltek, the manufacturer of the lowest priced carbon fiber with its near monopoly position, is also a key player in one of the most exciting new industries to emerge in a long time, namely alternative energy.

One other point. The other day the judge ruled on the SP Systems suit. You have all seen that ruling. After the ruling, RBC reminded us that after the initial suit, SP ordered 3.2 M pounds of carbon fiber making them one of the largest Zoltek customers behind Vestas. The SP contract ends in 2010. Any settlement with SP in exchange for a contract extension would certainly be an upside for Zoltek and perhaps a positive turn for SP Systems.

Anyway, I thought I would post an opposing position to the “short” poster and it is just one opinion. I have no idea how all this will play out. But that is what makes this investing game so much fun and never boring.
Jan

Zoltek Companies: Running out of Wind

The article was well written and appeared to have some good points but may not have been terribly accurate.

For example, the writer suggests that most wind mill blade manufacturers, less Vestas and Gamesa, do not use carbon fiber in their blades. He points out that LM Glasfiber (who is the world’s largest BLADE manufacturer) uses “virtually no carbon fiber in their blades today”. LM Glasfiber did say that in their 2005 annual report, but now that they are building longer blades they ARE using carbon fiber. From the LM Glasfiber web page:

FutureBlade is LM Glasfiber’s answer
to the technological challenges that the
new multi-MW blades present.
The FutureBlade technology plays an
important role in the design process
when we manufacture large blades using
a combination of glass fibre and carbon
fibre. Carbon fibre is stiffer and stronger
than glass fibre but more expensive. The
FutureBlade technology allows us to
design blades with the best possible
blend of carbon and glass fibre.

AND:
With production of the LM 61.5 P, we were able to customise the material we use for the core of the blade’s sandwich construction still further. In certain specific areas, we also used carbon fibre in the main laminate.
And the fibre technology development work we have done as part of the Future Blade concept has proved exceptionally positive all round.

The writer also devotes an entire page to the premise that Zoltek is over priced on a value basis. There is some merit to that argument given that at a $33 price, the Company is selling at 49x the 2007 projected EPS. But I did a PE exercise using the current analysts expectations If those projections are realized, the trailing PE ratios on future ZOLT earnings will come in as follows:
For FY 2007 Ending Sep, 49x (33/.67)
Q1 Dec 2007, 35x (33/.94)
Q2 Mar 2008, 29x (33/1.15)
Q3 Jun 2008, 24x (33/1.36)
For FY 2008, 22x, (33/1.49)
For FY 2009, 13x, (33/2.46)
Some of you might say that June of 2008 (for example) is far away. But we are in April of 2007 which is not far from June of 2008 given that the stock market is an anticipatory animal. The stock price will reflect the increasing earnings long before those earnings are actually realized. That is precisely why we are seeing a high price, relative to earnings, right now.
Also, if the earnings estimates are achieved, the quarterly EPS growth, Q to previous year Q, will be 36% for ZOLTs Q2, 2007; 83% for Q3, 2007; 1200% for Q4, 2007; 343% for Q1,2008; 140% for Q2, 2008; 95% for Q3 2008; and 69% for Q4 of 2008.
Full FY EPS growth rate will be 294% for 2007 (ending Sep) and 122% for 2008.
Estimates can often be wrong, but I would have a hard time shorting into those kinds of projections