What happens when you build too much manufacturing capacity but
not enough customers to keep your factory floor busy? You lose
costs quickly eat up any gross profits you make.
That has been the long-standing problem for carbon fiber maker
Zoltek (Nasdaq; ZOLT)
. The company assumed that carbon fiber demand would surge, but in
hindsight the company jumped the gun by opening up a new factory
too soon. Sales fell from $185 million in 2008 to $128 million in
2010 as the
slowed, turning a $20 million
in 2008 into an $11 million operating loss in 2010. Business
improved in 2011, though sales of $152 million were still far short
of what management originally envisioned.
You'll recognize Zoltek from a few months ago.
I originally recommended the stock
$100,000 Real-Money Portfolio
readers in early January. I encourage you to read that piece to see
why I think this stock has such huge upside.
Yet as my mentor Bob Bogda later explained
in this article
(at the end of the piece), I never got a chance to add this stock
to my portfolio at a rock-bottom price.
eventually zoomed into the low teens on a solid
I covered here
Well, despite that good news, shares drifted back, perhaps
because analysts at Needham & Co. remained dubious of any
upturn for this company, and placed a $10
and a "sell" rating on the stock. The stock almost got pulled down
to that mark this past week, until Zoltek made a significant
The company is partnering with
, one of the largest auto parts suppliers in the world. The firms
will jointly develop carbon fiber products for automakers that are
searching to shed pounds and boost the strength of their car and
Why is this deal so important? Because Zoltek's rivals, such as
and privately-held SGL Group (formerly known as SGL Carbon), are
already deeply entrenched with forward-thinking auto makers such as
Zoltek already has a solid presence in aerospace and wind
turbines, though exposure to the auto industry could really take
to the next level. Zoltek has ample idle manufacturing capacity,
and any new business is likely to be nicely profitable, as fixed
overhead costs are already in place.
So what was Needham's take? They boosted their rating to "hold,"
but remain wary. They correctly note that the
won't bring in sales right away, but add that "this should
eventually become a sizable opportunity for the company." So their
rating relates to short-term business trends, and not the long-term
I remain a huge fan of this company and am keeping an eye on the
for an entry point for my
Risks to Consider: Zoltek still delivers erratic quarterly
results. Could the recent pullback tell us the current quarter
won't be as strong as the fourth quarter? Perhaps.
Action to Take -->
It's hard to know how the quarter fared, so
upside is also possible. Shares, not trading far above tangible
of $8, discount the possibility of earnings in excess of $1 per
share within a year or two.
As I said earlier, I'll be watching this stock like a hawk for the
right entry point. Be sure not to miss a single thing and have my
updates sent to your email inbox, free for a limited time, as soon
as they're published by
signing up here
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.