What's thicker than water or blood? For Polypore International
Buy:
Market leader in resilient and growth industries. Polypore reigns at or near the top of its markets, which include membranes for lithium and lead-acid batteries, blood filtration used in dialysis and other procedures, and water filtration for industrial production. Lithium batteries are used in everything from phones to laptops to electric cars -- and that market is expected to increase demand at least 10% per year through 2015. Polypore's medical market is expected to increase at least 6% per year, and its water filtration, used to purify water for everything from food processing to making flat-panel displays, is expected to grow 8% annually.
The battery separator market provides Polypore's largest share of revenue, last quarter making up 77%. This helps Polypore insulate itself from economic slowdowns, because, as CEO Robert Toth described:
I can decide I'm not going to buy a mobile phone or a laptop for a quarter, but consumers in the space in which we participate don't ever say, 'You know what? The economy is weak. I am never buying a laptop. I will never buy a smartphone.' Or they'll trade down. And that doesn't matter to us.
To Polypore, a battery sold is a battery sold, no matter whether it is in the newest iPhone or the oldest TracFone.
Efficient trends. Polypore's third-quarter revenue rose 25.3% year over year while gross, operating, and net margins also all increased over that time. Increasing revenues and margins is a sign of growing efficiency and well-managed production. This gives investors confidence in Polypore intelligently running new production facilities that are coming online in the U.S., Korea, China, and Thailand.
Polypore uses a global purchasing strategy to achieve pricing leverage on its suppliers, including Celanese's
Sell:
Debt and competition. Polypore's balance sheet is strengthening because it continues to pay off debt, with total debt to equity improving from 228% to 153% in just the past year. However, this remains a hefty amount of debt. Compared to its larger competitors, like Fresenius Medical Care
|
Company |
Sales (LTM) |
Debt/Equity (LTM) |
|---|---|---|
| Fresenius Medical Care | $12,640 | 83% |
| Pall | $2,841 | 42% |
| Polypore | $742 | 153% |
Source: S&P Capital IQ. Sales in millions. LTM = last 12 months.
Hold:
Goodwill. Goodwill makes up nearly one-third of Polypore's assets, currently sitting at $469 million after writing off $131 million in 2009 related to the lead-acid battery division. Goodwill is the difference between the amount paid for an acquisition and the value of the acquired assets, so it is possible that shareholders' equity can be inflated if a company overpays for acquisitions. However, because of the recent writedown, the overall falling ratio of goodwill to assets, and Polypore carrying this goodwill at least since going public in 2007, I trust the goodwill is relatively fairly valued.
Price. Polypore is priced at a premium with a P/E ratio of 21.2 compared to the industry average of 15.7. While it may be more expensive than the industry average, Polypore's nimble size and focus on the growth markets makes it attractive when compared to its peers.
My call
Our Rule Breakers newsletter service recommended Polypore this past October, and I'm following its lead with a bullish CAPScall. The market potential is massive no matter who is a competitor, it is expanding production, management is paying down debt, and I have faith in consistent future growth.
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