When Will Polypore Payoff?

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by Debra Fiakas CFA


Diagram of a battery with a polymer separator.

Lithium ion batteries make it possible to recharge your smart phone, camera and a multitude of other have-to-have-with-us-every­-moment devices.  Yet the average person knows very little of the inner workings of something so important to our daily lives.  One little item in a battery is a highly specialized membrane that fits neatly between opposing electrodes  –  the positive and negative poles that make an electrical charge.  This membrane manages the charge and discharge process.

These membranes are so vital and the technology so particular, battery makers rely on membrane experts like Polypore International, Inc. (PPO:  NYSE).  Polypore operates under the Celgard and Daramic brands in this market.  Last year Polypore announced a $105 million expansion of its lithium ion separator manufacturing capacity.  The expansion is expected to be completed in 2013 and become operational in 2014.  Polypore had already expanded production capacity for its polyethylene battery separators used in lead-acid batteries.

With demand for batteries increasing each year, the news should have ignited shareholders.  Instead Polypore shares are trading 46% off the 52-week high.  High net profits and strong cash flows cannot be the problem.  Polypore earned $98.3 million in net profit or $2.08 per share on $751.1 million in total sales over the last year.  Operations generated $137.0 million in cash.  That represents a net income margin of 13.1% and a cash conversion rate of 18.2%.

Shareholder’s tepid response to expansion could be Polypore’s balance sheet.  At the end March 2012, long-term debt was $706.2 million, making Polypore’s debt-to-equity ratio 1.33.  That may not seem particularly weighty, but cash stood at a paltry $79 million.  For some investors, Polypore may appear to have a little financial flexibility.

If there was a time that Polypore needed to be agile it is now. The company has competitors coming at it from all sides.  Besides energy devices, Polypore’s membranes are used for filtration in medical devices such as those that perform hemodialysis and blood oxygenation processes.  Polypore’s filtration membranes also have applications for industrial equipment to clean sub-micron particulates from liquids or gasification processes.  Polypore has competitors in each group.  Asahi Kasei Chemicals Corporation based in Japan is one of the few that competes in with Polypore in all markets.

PPO is currently trading at 19.4 times trailing earnings.  However, analysts following Polypore have plenty of enthusiasm for the company’s future.  They have pegged next year’s earnings at $3.09 per share, implying a forward price earnings ratio of 13.1.  That is a compelling valuation for a stock with a beta of 0.45.

I do not have a precise timing for when Polypore shares will pay off for investors.  However, at the current depressed price level should give investors with the patience for a buy-and-hold strategy to find out.

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. PPO is included in the Storage Group of Crystal Equity Research’s Mothers of Invention Index.


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