A Jolt for Zoltek

For believers in carbon fiber firm Zoltek (Nasdaq: ZOLT), the latest operating results were a bit of a shock.

For the fiscal first quarter, sales fell 8% sequentially, and operating income before litigation charges plummeted 40%. Zoltek effectively blamed its customers for the shortfall, citing those firms' holiday plant closures and inventory stockpiling. Shares took a nose-dive of more than 19% in response to the news.

It is hard to believe that Zoltek, which has been in business for many years, would be caught off-guard by the observance of winter holidays in Europe. That leaves the inventory issue, which is more interesting.

In its SEC filings, Zoltek characterizes the carbon fiber market as one that has undergone significant price fluctuations as manufacturers periodically swing between over- and undersupply. When up-market aerospace suppliers like Hexcel (NYSE: HXL) and Cytec Industries (NYSE: CYT) find themselves with leftover carbon fiber, they dump it on the commercial market -- Zoltek's turf.

Recently, the aerospace guys have been kept busy with new programs from Airbus and Boeing (NYSE: BA). It would be a real mistake, however, to identify the current state of the market as marking an end to the supply cycle.

Despite the arguably inevitable return of oversupply, Zoltek's strategy is to offer what it calls "sustainable price leadership." This proposition equates to singlehandedly taking on the industry's cycles. The longer-term threat of periodic overhang is one issue here. On the other end is Zoltek's difficulty in quickly ramping up to meet today's demand. For example, the company's restarted plant in Abilene, Texas, has failed to meet targeted production levels.

No wonder, then, that Zoltek's customers are hoarding carbon fiber. They know that supply and pricing are far from sustainable. You can't really blame them, but apparently Zoltek can.