Tom Konrad CFA
Maxwell Technologies (NASD:MXWL) recently reported second quarter (Q2 2012) earnings. Revenue growth was sluggish (for Maxwell), up 6% year on year and 1% below estimates. The culprit was continued weakness in ultracapacitor revenue, which down slightly from Q2 2011 because of weakness in Europe.
Earnings, on the other hand, surprised strongly to the upside, at 9 cents per share, compared to estimates of only once cent, based on strong cost control and improving product mix. Strong growth in Maxwell’s Chinese hybrid bus and wind turbine businesses continue to drive profits.
Crucially, management maintained their 15% to 20% revenue growth guidance, although now they seem to be putting more emphasis on the bottom end of the range. However, the stock price fell so precipitously (by about two thirds) in response to lowered growth guidance after the Q1 2012 conference call that I believe further guidance cuts were already priced in. The rapid stock decline was largely driven by selling by growth mutual funds that are now almost completely divested of the stock. Simply maintaining revenue guidance this quarter should count as an upside surprise.
Putting this together, those of us who believed that the reduction in revenue growth was, as management said, more of a delay than a loss of future growth are likely to be rewarded with strong stock performance this week. According to CEO David Schramm in the earnings call, those believers include many Maxwell employees, in addition to the company executives (including Schramm) and board members we knew were buying because of required SEC disclosures.
Naysayers will continue to point to concerns arising from Maxwell’s growing reliance on the Chinese market as its European markets lag. Those concerns were highlighted by a Wedbush research report by analyst Craig Irwin. Yet even Irwin told me “Maxwell is most likely not at risk of being outcompeted” in China. His concern was that Maxwell’s decision to allow a subcontractor to sell own-branded ultracapacitors to customers Maxwell is unable to reach because of Chinese local content rules and other trade barriers increases the risk of direct competition in China. For Irwin, that increase risk means that Maxwell does not deserve as high an earnings multiple as before, not that he expects Maxwell’s Chinese business to disappear in a puff of smoke, as happened to AMSC. (NASD:AMSC) last year.
Maxwell’s business in China is much more diverse than AMSC’s was (the latter relied on a single customer, while Maxwell is in multiple markets, with many customers in each), and AMSC’s intellectual property was mostly software, while Maxwell’s is its much more difficult to replicate process of manufacturing its ultracapacitor electrodes.
Even with China risk, today’s price of $7.07 fully accounts for Irwin’s low price multiple: His price target is $8, at the low end of the range of analysts, who have targets ranging up to $20, with an average of $15.60. This leaves a lot of room for rapid price appreciation.
Disclosure: Long MXWL
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