It's been another rough week for Exide Technologies (NASDAQ:XIDE). Its stock price fell almost 40% on May 17, the day after the company announced that its financial performance would prevent it from meeting its creditor's convenant requirements on its Senior Credit facility. Shares continued to slide another 33% over the following week. (Exide also failed to meet covenant requirements in its previous quarter, according to page 8 of its third-quarter 10-Q, but received a waiver from creditors.)
According to the conference call, one convenant required Exide to generate $130 million of adjusted EBITDA -- earnings before interest, taxes, depreciation, and amortization. (While EBITDA makes plenty of adjustments to net income, adjusted EBITDA throws in a few more for good measure, including restructuring costs and a bunch of other non-cash expenses.) For the most recent quarter, Exide estimated it would earn only $100-$107 million in adjusted EBITDA. Fool me once, shame on Exide; fool me twice, shame on the creditors.
Costs are the core of Exide's problems. Rising lead costs now exceed one-third of the cost of goods sold. The company has increased prices to recover some of those lead expenses. But the commodity costs that make up the other two-thirds of the cost of goods sold, such as plastic resins for battery packaging, have been rising as well, the company said. Unfortunately, customers seem to have little sympathy for Exide's cost problems. Lead may make Exide's batteries a better value, but plastic packages do not.
In a previous take on Exide, I discussed how a branded commodity can be a great business model. Motley Fool Inside Value pick Coca-Cola (NYSE:KO) has its sugar water. Starbucks (NASDAQ:SBUX) has its coffee. Exide has its lead-acid batteries, a very important component for military, commercial, and consumer vehicles, and it just earned a contract to supply batteries for Toyota (NYSE:TM) trucks. But many other battery makers can do Exide's job just as well. In contrast, Coke and Starbucks supply unique and somewhat addictive experiences, giving them pricing power that Exide lacks.
Since Exide emerged from bankruptcy, its shares have fallen just over 81%. Given its dramatic price drop and the brand-name recognition gained through its NASCAR partnership, one would think Exide is an excellent value opportunity -- famed investor George Soros thought so. I'm not saying I'm smarter than Soros, but this branded semi-commodity is not like the others I mentioned. In my opinion, Fools would be wise to resist the temptation to buy.
Fool contributor David Meier does not own shares in any of the companies mentioned. The Motley Fool has a disclosure policy.
