August 1, 2012
Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of filtration specialist Polypore (NYSE: PPO ) were sliding today, down 12% following a disappointing earnings report.
So what: Net income dropped 43% from a year ago to $20.5 million and revenue fell slightly as well; Polypore's adjusted EPS came in at $0.51/share, missing estimates by $0.03. There's not much good news to be had from the manufacturer's report. Revenue fell across all four business segments, which was partially caused by the strengthening dollar, but the weak global economy wasn't the only culprit. Gross margin fell about 7%, from not only currency translation but also a change in geographic sales mix as exports to Asia grew, forcing shipping costs up.
Now what: Management put a positive spin in its outlook, saying they expect the second half of the year to improve over the first and that the company was well-positioned for long-term growth with most of its capital projects out of the way. I'm skeptical, though, after a quarter like this. Polypore derives about 25% of its sales from the electric vehicle market, sales of which have been slower than expected, and it's loaded with $715 million in debt compared to just $44.4 million in cash. Last quarter, its free cash flow was -$48.5 million.
As a small-cap stock with little growth, poor past performance, and a weak balance sheet, I see little reason to invest at this point.
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