To flyguy and Tulvio.
Thanks for the excellent posts on ZOLT. I have given some thought the valuation of Zoltek, and have summarized the results below. I chose to look at a "best case" scenerio, and then try to judge the risk vs. reward from there.
MARKET POTENTIAL (2001)
A research report by First Albany gives the following figures for demand for low cost CFs in the following new applications. Current consumption in these products is very small. All figures are in millions of pounds.
Auto Assembly = .5
Conductive/EMI = 8.5
Shipping Cont. = 11.0
Wood Beams = 16.0
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Total = 36.0
So, if Zoltek will sell 30 Mlbs of fiber in 2001, it will need to capture 75% of this new demand. Overall market growth would be on the order of 20%/year (from 28 Mlb base).
MARGINS AND PROFITS
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Reports from First Albany and Stifel Nicolaus suggest that Zoltek will sell fiber at $5/lb with a production cost of $3/lb. Thus gross margin will be 40%. At 30 Mlbs, all of the production from the Hungarian plant will be used in CF production.
Using this background, I have taken a stab at the 2001 income statement. All figures are in millions of dollars
Revenues: 150
Cost of Sales: 90
SGA + Depr. 20
Interest 2
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Pretax Profit 38
Taxes (40%) 15
After Tax Profit 23
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Number of Sh. 18
Income/Sh 1.28
Note the above assumes an additional 2 million share offering to finance the remaining CF production lines.
CONCLUSIONS
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Now, this would imply earnings growth of about 23% compounded over the next 5 years. The P/E ratios based on 1996 and 2001E earnings are 76 and 27, respectively.
So, my concern is that the current stock price effectively discounts the "best case" scenario out to the year 2001. Accordingly, the risk/reward seems a bit skewed to the high side a current valuations. Should Mr. Market give us a chance to purchase this company at a 50%+ discount, I would be interested.
I would appreciate any thoughts you have on the above analysis.
ADDITIONAL COMMENT
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According to the 1995 annual report R&D expenditures for ZOLT were only $370,000 and no significant intellectual property positions were held. The concerns here are can ZOLT actually grow the market as they say without significant increases in development costs, and what barriers do they have to competition should the market become lucrative? |
