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When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether its possible upside outweighs its risks. Let's take a look at Exide Technologies (Nasdaq: XIDE ) today and see why you might want to buy, sell, or hold it.
With a market cap of only about $230 million, this is a small company that specializes in lead-acid transportation and industrial batteries -- and battery accessories (such as chargers). It also recycles batteries.
The first thing that drew my attention with Exide was its valuation -- the stock looks cheap. It recently sported a price-to-earnings (P/E) of roughly four, and a forward-looking P/E of just six -- when the overall S&P 500 forward P/E is close to 14.
Revenue is growing for the company, too, over the past two years. But its 2012 revenue is still lower than its 2009 level. Net income is in the black and rising, but it's still rather low, thanks to a 1.8% net profit margin. Recent results have been pressured by rising input costs that have been driving margins down. The recent warm winter didn't help either, as fewer batteries were knocked out by cold temperatures.
Bulls are hoping that the growth of electric vehicles will spur growth for Exide. While they wait for that, though, the company does seem to be engineering a turnaround. It has been cutting back on its capacity and expenses, while streamlining its operations (such as by shedding a recycling center in New Zealand). One factor that has been helping it has been, ironically, the bad economy, in which people have been hanging on to their old cars longer, thus requiring more after-market batteries, which make up two-thirds of Exide's transportation segment revenue.
Thus, as my colleague Rich Duprey has pointed out, Exide's fortunes are a bit at odds with carmakers such as Ford (NYSE: F ) and General Motors (NYSE: GM ) . Ford and GM seem poised for success, though, with Ford selling well in fast-growing China, for example, and GM turning itself around, though not as briskly as management wants. Exide does sell batteries to carmakers, but mostly foreign ones, such as BMW and Honda. Domestic customers include Deere and PACCAR.
In other good news, the company is now the sole battery supplier for the Pep Boys (NYSE: PBY ) chain. It previously provided Bosch-branded batteries, but now will provide all batteries -- and the company is bullish about it because of Pep Boy's high core return rates. Pep Boys itself has been struggling, though, and a privatization plan recently fell apart.
As attractive as the price may seem, there are some reasons why the stock is depressed. For one thing, look at the company's debt: As of the end of June, there was $752 million in long-term debt, and $130 million in cash and cash equivalents. Free cash flow is negative and has been negative for three of the past five years.
While some are pinning a lot of hope on electric vehicles as a catalyst for Exide, it may not happen anytime soon. The company had to declare bankruptcy about a decade ago, and it needs to be performing better soon in order to not head in that direction again.
Then there's this: Exide's stock price is another red flag -- recently around $3 per share, it's firmly in penny-stock territory, known for extra-risky companies and many lost fortunes.
Given the reasons to buy or sell Exide, it's not unreasonable to decide to just hold off. You might want to wait for stronger quarterly earnings, for a healthier automotive market, for its debt load to lessen, or for the company to develop new income streams.
You might also want to look at some of Exide's competitors, such as Delphi Automotive and Johnson Controls (NYSE: JCI ) , which are also major battery makers. They have their own issues, though. Johnson Controls, for example, was recently downgraded, with analysts worried about weak sales and limited supplies of spent battery cores. Debt and cash burn are also issues. Delphi has been hurt by Europe's slowdown as well as insiders selling.
I'm holding off on Exide for now, but everyone's investment calculations are different. Do your own digging and see what you think. Remember that there are plenty of compelling stocks out there.
One of those compelling stocks might be Ford. Ford's stock has dropped significantly in the past few months, down to around $9 a share. The company's exposure to the mess in Europe has a lot to do with that, but Ford is still performing well at home, building good vehicles, and investing heavily for growth in China. Does this dip in Ford's share price present and attractive buying opportunity, or are there hidden risks associated with the stock? To answer that, one of our top equity analysts has compiled a premium research report that answers the question: Is Ford a buy, sell, or hold? Simply click here to get access to this premium report today.