Tuesday, August 11, 2009

Zoltek (NASDAQ:ZOLT): Color on quarter

While Zoltek (NASDAQ:ZOLT) does not have too much sell-side coverage, we still have two firms out commenting the results from last night:

- Sidoti notes sales fell 33% to $30.3 million in 3Q:F09, from $45.0 million in the previous year. The revenue decline was led by a decrease of 33.6% in the carbon fiber segment sales to $25.0 million, a sequential decline of 13.5%. The softer sales in the carbon fiber segment are related to a slowdown in the wind energy market, which combines for 57% of the company’s total revenue. Delays in wind energy projects await financing and government stimulus. We expect wind energy sales to remain weak for the remainder of F2009 and 1H:F10. By our model, the carbon fiber segment will fall 28% in F2009 to $112.3 million (from $156 million in F2008). Therefore, we reduce our F2009 estimate to a loss $0.01 (from EPS of $0.13) and reduce our F2010 EPS estimate to $0.28 (from $0.44). We also introduce our F2011 EPS estimate of $0.44, which assumes sales growth of 20% to $148.3 million.

We consider ZOLT’s growth potential through F2011 to be reliant on a recovery in the wind energy market. Meanwhile, with 57% of ZOLT’s revenue coming from two wind energy customers, concentration risk is high, in our opinion. We would reconsider our rating if the shares fell below $5 with no change in fundamentals.

- RBC says they expect significant stock downside:

RBC fundamental thesis #1 is playing out: despite mgmt denials, companysuffering significant price erosion as wind turbine developers delayincorporating carbon fiber into their blade designs, but more importantly, webelieve, based on our channel checks, customers are transitioning to other fiber suppliers (SGL, Grafil, Tenax) as concerns on Zoltek fiber quality increase.
RBC fundamental thesis #2 playing out: excess capacity fromhigher-quality aerospace fiber suppliers is being dumped on Zoltek's industrial grade market.
Mexican Plant Idled: Company incurring large fixed costs on recentlyretooled Mexican plant, with little near or medium term outlook for demand.
Balance Sheet Risk: We believe structurally lower demand, reduced marketshare for Zoltek, and higher fixed asset costs will likely continue todeteriorate company's balance sheet, potentially requiring additional capitalinfusions.

Action: This is ugly mess and I have to agree with RBC about the stock coming under significant pressure today. If you can get fills for shorts above the $9 level it should be worth taking. The potential recovery is way too far away - 2H2010 at best, so there should be plenty of investors wanting to get out today. 20% haircut should be appropriate for today and would expect the stock to stay weak in the next few weeks.

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