Zoltek: High in Fiber, Low in Valuation

by Debra Fiakas CFA

The Stohr DSR has an all carbon fiber body (Photo credit: Rhots/Wikimedia Commons)

 
Zoltek Companies (ZOLT:  Nasdaq) is in the business of fibers, mostly carbon fibers.  Plain, simple fibers may not seem very impressive.  However, Zoltek’s carbon fibers are in wide demand for renewable energy applications such as wind turbines blades and deep sea oil and gas wells.  After two years swimming in red ink, Zoltek has managed to bring sales back up to 2008 levels.  The company earned $22.9 million in net income on $186.3 million in total sales in the fiscal year ending September 2012.  During the same period Zoltek cleared 9.3% of total sales as operating cash flow.

Analysts are expecting modest growth in the next fiscal year.  The consensus estimate is $0.69 on $189 million in total sales in fiscal year 2013.  The estimate has remained unchanged in the most recent weeks, even though Graftek failed to meet earnings expectations for the September 2012 quarter.

Zoltek’s management is a bit more enthusiastic about its future.  That is because the carbon content of durable goods is rising at a fast pace  –  so fast some manufacturers are concerned about a shortage of carbon fibers in the future.  For example, aircraft are adopting carbon composites for floors, luggage bins and even seats as a means to reduce overall aircraft weight.  Boeing’s Dreamliner 787 is the first large-scale commercial aircraft made using 50% composite materials including plastics and carbon fiber.

The company has been working on new technologies for cutting and milling carbon fibers to facilitate mixing carbon fibers with thermoplastics.  Such plastics are now used in electronics such as computer hard drives and printers.  Lacing the thermoplastic with carbon would add durability and extend the range of potential applications. Most likely new markets would be automotive and aerospace.

Zoltek has spent $23.8 million or 5% of sales on research and development efforts over the past three years.  Indeed, R&D has taken on added visibility over the past couple of years with the central effort carried out at the company’s plant in St. Peters, Missouri.  Much of the effort is aimed at improving production processes, but management is also keen on finding new ways to use carbon.

The automotive industry figures prominently in Zoltek’s growth plans.  In 2010, the company formed a new subsidiary, Zoltek Automotive, to help facilitate the adoption of carbon materials in cars and trucks.  Tesla Motors (TSLA:  Nasdaq) already uses Zoltek fibers for its electric sports cars.

Zoltek can afford to move aggressively on market opportunities.  At the end of September 2012, there was $29.9 million in cash on its balance sheet.  Debt totaled $27.1 million, but the debt to equity ratio is a modest 0.09.

We have added Zoltek to the Materials Group in our Mothers of Invention Index for innovators in energy, efficiency and conservation.  The stock trades at 11.1 times forward earnings, which looks like a bargain for a well-capitalized company that appears poised to offering significantly higher growth.
 
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.