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Did Polypore's Battery Just Die?

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Filtration-technology maker Polypore International (NYSE: PPO  ) saw a free fall in its shares after announcing fourth-quarter results. While some may think this was a fallout over "disappointing" numbers, I think their results were just fine. The market seems to have been unsettled by the threat of competition from a current buyer.

So how big is the threat for Polypore?

LG Chem, no longer a chum
One of Polypore's buyers -- LG Chem -- now plans to invest as much as $480 million in setting up its in-house production facility for lithium battery separators. LG Chem, a South Korean industrial giant, supplies lithium ion batteries for General Motors' (NYSE: GM  ) Volt electric car. Obviously its entry into the separator market will eat into Polypore's market share.

However, the extent of this threat is still not clear, as LG Chem's plans are still in formation, which also makes it uncertain whether this company's products will directly compete with those of Polypore's. But the market has already regarded this as bad news, since sooner or later it seems like it could weigh on Polypore's profitability. Regardless, let's take a look at the fundamentals of Polypore.

Let the numbers do the talking
Polypore's revenue climbed to $191 million, a considerable 13% rise compared to the year-ago quarter. Earnings increased by a staggering 47%, to $0.58 per share, but even this failed to meet market expectations of $0.59 per share.

What gives me hope is that Polypore recorded growth in key areas. Polypore earns most of its revenue by selling lead-acid and lithium battery separators. Sales of the latter spiked up by a noteworthy 53% compared to the year-ago quarter. Lithium battery separators are used in hybrid and electric-driven vehicles or EDVs, a segment that has seen robust demand lately.

So why did the stock go down? The huge market for lithium is a major growth driver for many such companies. And this is exactly why the LG Chem announcement may dim Polypore's prospects.

The Foolish takeaway
Despite the threat, Polypore has quite a few positives to support its growth in the long run. Apart from a good battery-separator business, the company has also posted moderate growth in its separation-media business backed by better sale of its healthcare, filtration, and specialty products.

Polypore's debt scenario is also decidedly brighter. A debt-equity ratio of 142%, down from 158% six months ago, definitely looks like an improvement. Plus, at a price-earnings ratio of 18 times, I think Polypore looks good to grab.

What do you think? Track Polypore International by adding it to your Watchlist.

Navjot Kaur does not own shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of General Motors and Polypore International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 05, 2012, at 1:19 PM, pdreher wrote:

    GM wants to drop LG Chem as soon as their contract is up in 3 years, because their batteries flame and explode like a string of Chinese firecrackers. GM only choose them because they had a deep pocket to back up a 10 year warranty, unlike start-up A123. A123 batteries only puff a single cell and last twice as long as LG's. So all new GM batteries, including e-Assist, are A123, which use Polypore.

  • Report this Comment On March 05, 2012, at 2:19 PM, abujordan wrote:

    I don't think the 'LG Chem Threat' is the issue.

    On the conference call, I believe they said that in LG's own words, the goal of the new LG facility would be to produce 50% of *LG's own* needs. They will not be competition.

    Also, it sounds like two major applications were delayed by their manufacturer's into the next quarter. The impression I got was that the lower numbers being predicted were because of this delay, which is beyond PPO control. I think this 'bad news' is what is driving down the stock, not the threat of LG.

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