Thursday, August 20, 2009

Exide Technologies (NASDAQ:XIDE): Upgraded at Thomas Weisel

Thomas Weisel is upgrading Exide Technologies (NASDAQ:XIDE) to Overweight from Market Weight:

What’s New: We recently spent time with Exide management on the road, following which we came away impressed with management’s willingness to go through with tough but necessary restructuring efforts, their expected payback in the form of significantly improved gross margins and adjusted EBITDA in the back half of the current fiscal year, and the company’s strong positioning exiting FY10 should an economic recovery trigger a pickup in demand in FY11 now that demand appears to have bottomed out.

Why It Matters: Based on the expected closure of plants in France and the U.K., and management’s clearly communicated resulting estimated cost savings of $98mn on an annualized basis, we see Exide exiting FY10 at an annualized (adjusted) EBITDA run rate of over $200-250mn that is not dependent on a pickup in demand trends. In hindsight our previous EBITDA estimates were overly conservative given management’s expectations for a significant sequential improvement in (adjusted) EBITDA in F2Q10, and y/y improvement in 2H FY10. We now have more confidence in the expected cost savings. As a result, we are raising our FY10 adjusted EBITDA estimate to $170mn from $130mn. We see potential for (adjusted) EBITDA of $250-300mn in FY11 should an economic recovery trigger an uptick in demand, particularly in the industrial network and motive power businesses.

Upgrading from Market Weight to Overweight: Given that the company is still in turnaround mode with significant interest and depreciation expenses as well as capital expenditure, we believe investors use an EV/EBITDA multiple when valuing Exide. We see a 6x multiple on our FY11 EBITDA estimate as reasonable, driving our revised price target of $11 and hence the Overweight rating. To be clear, our upgrade to Overweight is not driven by growth catalysts, rather for long-terminvestors on valuation based on improving EBITDA metrics from cost reduction efforts, which position the company very well for an anticipated economic recovery in 2H CY2010.

Valuation: Our 12-18 month price target of $11 is based on a 6x EV/EBIDTA multiple on our FY2011 estimate.

Raising estimates: We are raising our FY10 adjusted EBITDA estimate to $165mn from $135mn. Our corresponding revenue and GAAP EPS estimates go to $2.51bn/$(0.91) from $2.51bn/($1.18). We are establishing our FY11 revenue and EPS estimates of $2.64bn and $0.58 respectively. Our adjusted EBITDA estimate is $242mn.

Action: This came out after the close and I just had to post it right away. This call and the stock have all the ingredients for a huge rally tomorrow:
* very volatile stock - check
* low market cap compared to revenues and EV, just the way momo crowd has liked recently - check
* hot sector - check
* upgrade that makes sense and has some real research behind it - check
* high price target - check

This stock can go up 10+% tomorrow in a heartbeat. Only thing keeping me from expecting even more is today's rally - there might be some quicter hands wanting to lock profits early on.

1 comment:

  1. Good call. Given how well the sector's doing, the upgrade had an extra kick. My guess is that if the uptick is to be continued for an extended period, XIDE needs to show top line growth potential. It's not yet clear to me that they have much more potential than the general recovery will provide.