Will Zoltek Be Jolted Back to Life?

The world's top value investors love it when their best stocks ideas are selling at bargain-basement prices. For those rarified investors, companies offering fire-sale prices become no-brainer buys. So regular investors like you and me would do well to emulate the masters and look at companies offering a "buy one, get one" sale on their stocks.

Carbon fiber manufacturer Zoltek (Nasdaq: ZOLT  ) has had the wind taken out of its sails as fears of waning enthusiasm for the wind power industry weighs heavily on its performance. While you'll naturally want to do more due diligence before buying in, this still might be an opportunity to pick up a quality stock at a severe discount.

Zoltek snapshot

Market Cap

$249 million

Revenues (TTM)

$185 million

1-Year Stock Return

(0.6%)

Return on Investment

7.3%

Dividend and Yield

N/A

Estimated 5-Year EPS Growth

15%

52-Week High

$15.01

Recent Price

$7.25

CAPS Rating (out of 5)

*****

Source: FinViz.com. N/A = not applicable; Zoltek doesn't pay a dividend. TTM = trailing 12 months.

Let's just make sure there's nothing more seriously wrong with it before you go and plug it into your portfolio.

No tailwind in sight
It's become fairly clear that without the regular infusion of massive government subsidies, green energy can't be competitive. As tariff support, tax breaks, credits, and loan guarantees expire or are withdrawn, global solar and wind power companies fall by the wayside as cost effective production can't be achieved. Uncertainty surrounding the extension of the production tax credit led industry-leading turbine producer Vestas Wind Systems to eliminate nearly 20% of its U.S. workforce.

That's a major problem for Zoltek, which generates half of its revenues from the turbine maker. Its stock had gotten a bit of a boost early in the month because of a bullish analyst call but subsequently went into freefall once again, tumbling 13% over the last three weeks and now sitting more than 51% below its 52-week highs.

Despite growing revenues 30% last quarter, the future remains shaky for the materials maker since wind power is the near-term catalyst for growth, but more doubts about the energy source continue to crop up. A recent Reuters story noted that offshore wind farms -- generally considered the most popular choice for the unsightly turbines since they're far out to sea -- cost more per megawatt to hook up to the electric grid than it does to build new gas-fired power plants.

Four on the floor
So, if wind energy won't be able to waft Zoltek higher, what will the company turn to? Cars.

Zoltek anticipates the automotive industry will eventually become the largest consumer of carbon fiber material. It established a partnership with Magna International (NYSE: MGA  ) to develop carbon fiber sheet molding compounds for the automotive industry, which has increasingly been looking for alternatives to meet strict fuel economy standards. They have to achieve a fleet average of 54.5 miles per gallon by 2025.

According to the Energy Department, a 10% reduction in vehicle weight increases fuel economy by 6% to 8%. General Motors  (NYSE: GM  ) wants to start using carbon fiber components in its vehicles by 2015, which it expects will reduce vehicle weight by 20%. BMW, Mercedes, and Volkswagen are also wading deeper into carbon fiber, as is Ford (NYSE: F  ) , which is teaming up with Dow Chemical (NYSE: DOW  ) to help to cut between 250 pounds and 750 pounds from its new cars and trucks by 2020. 

The greater interest will help remove perhaps the greatest stumbling block to wider acceptance: the high cost of carbon fiber. It goes for around $10 per pound compared with steel, which costs just a fraction of that. With the material weighing one-third that of steel, but being five times stronger and twice as stiff, the key will be making the material cheaper.

The future is now
Unfortunately for Zoltek, that's all in the future, and while it holds potential, even the company acknowledges its immediate future is in wind, which is stuck in the doldrums. The stock might seem cheap at under 13 times earnings estimates, but there's no great catalyst for it to move forward right now. As a result, I'm rating the carbon fiber manufacturer to underperform the market averages on Motley Fool CAPS, the 180,000 member-driven investor community. By doing so I hold myself accountable to readers for the CAPScalls I make here.

Let me know in the comments section below if you think Zoltek can stiffen its resolve and overcome the strong headwinds opposing it.

Take a closer look
Want to see what else Ford is up to beyond integrating carbon fiber? The Motley Fool's top equity analysts have compiled a premium research report with in-depth analysis on whether Ford is a buy right now, and why. Simply click here to get instant access to this premium report.

Fool contributor Rich Duprey has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford and General Motors. 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.


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  • Report this Comment On October 26, 2012, at 9:14 AM, philosi wrote:

    You mentioned "uncertainty surrounding the extension of the production tax credit". I think that you know that the production tax credit is a political football right now so why not mention that or simply wait two weeks to find out who will occupy the White House and what the 2013 makeup of the Senate will be? Or have you concluded that the future of wind power is as you say "stuck in the doldrums" for 2013 regardless of the outcome of the Nov elections? As a stockholder I am most definitely focused on the 2013 outlook and the extension of the PTC. Thank you if you can elaborate a what-if commentary to follow up on these aspects.

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